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Aug 11, 2017

HDFC Bank’s intrinsic strength becomes weaker

State owned HDFC Bank’s intrinsic strength will be weakened if the government is failed to raise the bank's capital to meet the minimum Rs.5 billion capital requirement by 1 January 2018, Fitch Ratings agency said.

The requirement has been in force since 2016 and Fitch would see a further
delay as an indication that creditors may no longer be able to rely on sovereign support in a timely manner, notwithstanding HDFC Bank's unchanged linkages with the state.

HDFC's rating of 'BBB(lka)'on Rating Watch Negative (RWN) reflects Fitch's expectation that the bank would receive extraordinary support from the sovereign, if required.

Fitch Ratings agency assessment captures the state's 51% effective holding, of which the National Housing Development Authority directly owns 49%; the bank's quasi-policy role in supporting housing-development initiatives; as well as HDFC Bank's low systemic importance.

Fitch estimates that it would take HDFC Bank more than four years to generate the required capital from retained earnings.

Its profitability, in terms of return on assets, has been declining because net-interest margins have been contracting due to higher funding costs stemming from the bank's short-tenor deposit base, which reprices regularly, and its high-cost business model.

The bank's profitability, funding and liquidity could also be affected by business
restrictions imposed by the Central Bank of Sri Lanka (CBSL).

IRD gears up to implement the new Inland Revenue Act

Sri Lanka is gearing up to implement the new Inland Revenue Act which is expected to make the tax system more efficient and equitable, and generate resources for social and development programs.

The country’s fiscal consolidation, considered key to improving macroeconomic fundamentals, now hinges on this new Act The Inland Revenue Department has started preparing for its implementation, including by establishing a steering committee and project teams, drafting detailed tax manuals, and initiating communication with stakeholders,” the IMF said.

Despite some delay in passing the VAT amendments, the government authorities met the IMF program targets on tax revenues and the primary balance.

However, the end-2016 reserve target was missed reflecting the resumption of portfolio outflows late in the year and intervention to limit currency depreciation. Progress has been made in most fiscal-structural reforms, but energy pricing reforms have stalled due to political resistance.

Sri Lanka’s overall fiscal deficit decreased from 7 percent to 5.4 percent of GDP between 2015 and 2016, with public finances strengthening under an IMF supported program, the fund said releasing its country report.

The budget deficit is projected to fall to 5.2 percent of GDP in 2017, although the figure is up from a previously budgeted 4.8 percent.

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