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"I would almost think impairments are going to double this year and that is going to have a huge impact on profitability," Alles told a business forum organized by Asia Securities, a Colombo-based equities brokerage.
Under IFRS 9 banks will be required to assess future cash flows of their lending portfolios, unlike in the past where banks measured credit profiles of borrowers based on historic accounting records.
"Regulator and auditors will test our lending portfolios for anything weak, so it will be challenging for us to maintain certain portfolios that we manage carefully now
"IFRS 9 puts restrictions and pressure on us and non-performing loans ratios will rise because of this and not only because borrowers are failing to service their loans".
Central Bank Governor Indrajit Coomaraswamy said Non-performing loans had already risen to 3.5 percent from a low of 2.5 percent last year, but it was below historical trends.
Weaknesses in macro fundamentals have seen banking sector non-performing loans increase with particular sectors more affected than others.
"Some of the receivables due from the construction industry are not coming in as expected, pharmaceuticals are facing tight margins, the trading industry has huge receivables, and agriculture has been having real difficulty over the last few years," Alles said.
Alles said banks have taken measures to stem the non-performing loans growth and as a result credit growth could slow down in the short to medium term.
"You'll see loan growth probably slowing down a little bit in order that we reverse this situation because what you don't want is the banking industry showing signs of weakness," he said.
Hatton National Bank has considerable exposure to small and medium businesses and also engages in micro finance.
"We are feeling the pressure because the cost of recovery is higher at those levels.
We understand the difficulties our customers are going through, and we are giving them more time to settle their loans," Alles said.
However, auditors and regulators are not too concerned about the difficult times and continue to apply the norms, he said.
IFRS 9 will force banks to revisit their lending policies, even to larger corporates.
"Bank will have to raise the bar on credit standards. A knee-jerk reaction to IFRS 9 could be more cautious lending leading to lower credit growth" Alles said. (COLOMBO, 25 October 2018)
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