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 measures were initiated. Nevertheless, the severity of these effects on the banking system has not been adequately documented in the literature. Thus, this study examined the effect of the COVID-19 pandemic on the performance of Sri Lankan banks using a sample of 18 licensed commercial banks. The data was collected from annual reports published by relevant banks for the ten years from 2012 to 2021. Return on equity, net interest margin and non-performing loans were used as measures of bank performance. Further, the study used liquidity measured using loan-to-deposit ratio, interest rate spread and state of the economy measured using gross domestic product growth rate as control variables. The results of three fixed effects panel regression models suggest that the COVID-19 pandemic has introduced statistically significant adverse effects on bank performance. This indicates that even though policy measures were taken, the banks have remained vulnerable. This implies that developing countries like Sri Lanka need comprehensive policy measures implemented at the initial stage of global pandemic situations to mitigate their adverse effects on the banks.