Impacts of Non-Performing Assets to the Performance of Banking Sector in Sri Lanka

Abstract

With the ending of 30 year old civil war, Sri Lanka was expecting an economic growth for which the banking sector of the country will play an essential role in largely working as a financial service provider, especially as a lender to meet working capital requirements of the rising small medium enterprises (SMEs), Corporates and other businesses.

However, during the period that the Nonperforming loans (NPLs) have increased while the key performance indicators of the banking sector such as profitability, liquidity, capital adequacy and loan books have deteriorated drastically.

Hence, the prime objective of the study is to determine effects of NPLs to the performance of banking sector of the country by addressing to different areas such as how sensitive the snowballing NPLs are being influential in changing the performance of the banking sector in Sri Lanka and what are the pivotal factors which can tiger NPLs in a bank and which sectors are more prone for defaults?. Further, how to overcome this situation and what are the mitigating factors with best methods to improve the lending quality of Sri Lankan banks. Also, downfalls in classifying NPL criteria with implementation of IFRS 9 in Sri Lanka.