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CBSL Continues To Treat Gold As Riskless Asset

  • Despite Falling Prices

Despite the recent fall in gold prices, Central Bank of Sri Lanka (CBSL) continues to deem gold as a zero risk weighted asset, with banks not liable to make any mandatory provisioning against such assets.
This was revealed by CBSL’s Director Bank Supervision Yvette Fernando to a question posed by this reporter at a seminar on “Risk Management” held in Colombo on Thursday (September 26).
She further said that banks have made their own arrangements to contain this risk.
However in an article published in The Sunday Leader (TSL) business pages in its August 11 edition under the heading “Poor Governance Blocking FDI,” that story quoting Fitch’s Head of Bank Group, South Asia, Ambreesh Srivastava, had said that in the context of falling gold prices, the island should have a relook at its position of classifying pawning assets as being zero risk weighted. The same applies to government debt, he had said.
TSL, in yet another article published in the business pages of its June 23 edition under the heading “Gold Fall, Inflows Drying Up Hit Bourse,” had said: “The price of an ounce of gold since the end of last year and up to the present has had fallen from US$ ($) 1,930 an ounce to $ 1,300.
CBSL allegedly to shore up the price of gold imposed a 10% import tax on gold.
The two state banks, namely Bank of Ceylon and People’s Bank, the two largest commercial banks in the country and which account for a third of the assets held by the banking sector, has a pawning asset base valued at Rs. 202 billion, constituting up to 18-20% of their assets portfolio.”
According to the internet, the price of gold has since gone up to $ 1,324.30.
Meanwhile in an article published in the TSL business pages on its September 1 issue under the heading “No Method To Check If Pawning Loans Used For Agriculture,” it was said in that news item that banks’ pawning loan portfolio occupies a figure of 17%.
The same article which also included a press release sent by the Sri Lanka Banks’ Association said that of the total advances of banks amounting to Rs. 3.27 trillion, pawning advances constituted 17.9% or Rs. 585 billion as at end June 2013.
Non Performing Pawning Loans as a percentage of total pawning advances amount to 4.2% which is lower than the overall NPL ratio of 4.7% in the banking system and despite the recent drop in the price of gold, the level of loss given default is likely to be less than that experienced for many other collateral classes relating to loans given by banks, the release had further said.
In yet another article also published in the business pages of this publication’s September 1 issue, this time under the heading “Falling Gold Prices Hit Farm Loans,” that story quoting Amana Bank Managing Director/CEO Faizal Salieh said that “banks generally shy away from giving loans to the farmer because of the vagaries of the weather and its effect on the harvest. But an outlet was provided in the form of pawning loans. However, now with gold prices falling, there is a grey area in respect of exploiting that avenue as well,” he had had further said.
The event was organised by KPMG. (PA)

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