Sri Lanka finance companies at risk from soaring micro-credt: Fitch
Apr 01, 2016 09:37 AM GMT+0530 | 0 Comment(s)
ECONOMYNEXT - Sri Lanka's non-bank lenders or finance companies are at risk from micro-finance which has soared from 4 percent of total credit in 2014 to 27 percent by December 2015, Fitch Ratings said amid a gap in regulation.
Micro-finance involves giving a loan to an individual who is part of a small group, with the rest of the group members cross-guaranteeing the loans If there is a default.
"Lending is generally in small amounts, and is used to support income-generating activity," Fitch said.
"It involves uncollateralised lending to a customer segment that is usually characterised as of low income and with limited access to formal financial services.
"Consequently, Fitch believes that lending to this segment is likely to be more susceptible to asset-quality deterioration during periods of economic stress."
Fitch said there was no "comprehensive regulatory and supervisory system for the microfinance sector".
"As a result, many of the large number of institutions engaged in the provision of microfinance are unregulated," the rating agency said.
"Efforts to introduce such regulations have been ongoing for many years, including the passing of a microfinance bill. Fitch maintains that the passage of prudential regulatory requirements on microfinance entities should be positive for the financial sector."
Fitch-rated non-bank lenders have made efforts to manage the risk of their significant exposures to microfinance through product structuring, regular collections and close contact with borrowers.
Lending rates on microfinance are also generally high, due to the higher risk.
But Fitch said rising exposure to microfinance especially during a period of when "operating conditions could become more challenging for the financial sector as a whole."
Fitch expects Sri Lanka's economy will grow at percent in 2016.
"But the outlook for the financial sector is largely dependent on the operating environment, and volatility remains a key risk in the economy. Notably, Fitch downgraded the sovereign to 'B+' in March with a Negative Outlook."