Effect of COVID -19 Pandemic on the Performance of Sri Lankan Banks

Abstract

The COVID-19 pandemic has created detrimental effects on the Sri Lankan economy even though several fiscal and monetary policy changes were initiated to curb the negative effects. Nevertheless, the severity of the effects of the covid-19 pandemic on the banks has not been adequately documented in the literature. Thus, this study examined the effect of the COVID -19 pandemic on the performance of the Sri Lankan banks. A sample of 24 banks consisting of 18 licensed commercial banks (LCB) and 6 licensed specialized banks (LSB) in Sri Lanka was selected for the study. The study relied on data collected from annual reports published by LCBs and LSBs from 2012 to 2020. Return on assets (ROA), return on equity (ROE), and net interest margin (NIM) were used to measure financial performance. Further, the study used bank risk measured using non-performing loans ratio and loan to deposit ratio, and the state of the economy measured using GDP growth rate as control variables. The fixed effect panel regression model was used as the main analytical tool of this study. The results of three fixed-effect panel regression models suggest that the COVID-19 pandemic has a statistically significant adverse effect on the performance of banks in Sri Lanka. This indicates that even though policy measures are taken, the banks are vulnerable in turbulent situations. This implies that developing countries like Sri Lanka need more aggressive and comprehensive policy measures at the initial stage of global pandemic situations to mitigate the adverse effects on the banks.