Banks overload ATMs with cash

Sri Lankan banks are taking precautions to prevent customer panic amid Domestic Debt Optimization (DDO) discussions. Concerns have arisen not because of the DDO itself but due to comments made by members of Parliament, which have created unnecessary fear among the public.

 

 

To address potential misunderstandings, banks have increased the cash reserves in their Automatic Teller Machines (ATMs) to avoid any perception of cash shortages. This measure aims to prevent people from interpreting a cash-depleted ATM as an indication of the bank running out of funds.

 

 

Although there is no significant panic among customers to withdraw money, people have been questioning the banks. However, the Central Bank Governor, Dr Nandalal Weerasinghe, reassured the public that their deposits in any bank would not be affected by the DDO. State Minister of Finance Ranjith Siyambalapitiya also stated that domestic debt would not undergo a haircut.

 

 

A senior banker emphasized that the maturity extension of bonds will not impact deposits, as most bonds are typically rolled over upon maturity. The banks held approximately Rs. 3.1 trillion in Treasury Bonds at the end of 2022, accounting for around 35% of the total issued by the government. The non-banking sector held 60% or Rs—5.2 trillion of the Treasury Bonds.

 

 

The BOC Employees Union's General Secretary, Ranjan Senanayake, expressed confidence that banks can withstand any impact from the DDO without affecting bank deposits. However, clarity is needed to minimize the effect on capital adequacy requirements and profitability.

 

 

It is anticipated that banks will not be able to report abnormal profits in the 2023-24 financial year due to the DDO, as the significant capital gains from high-yield bonds in a declining interest rate environment will be reduced.

 

 

A senior banker mentioned that a consensus in the banking sector suggests a 5-year maturity extension, depending on the bond type, along with a coupon adjustment as part of the DDO. The concern is how banks will absorb the initial losses associated with derecognition when new bonds are issued in exchange for old bonds during the DDO.