ECNOMYNEXT – The ratings of finance and leasing companies will face downward pressure amid a slowing economy and rising bad loans, Fitch Ratings has asid.
“Sri Lankan finance and leasing companies’ (FLCs) loss- absorbing capacity is likely to deteriorate further in the medium term due to high asset-quality risks and weakening profit buffers as a result of a prolonged slowdown in economic activity,” the rating agency said.
“Fitch Ratings sees capital-impairment risk as more acute across the small- to mid-sized FLCs due to pre-impairment operating profit buffers which are already weak; a small absolute capital base; and high share of unprovisioned non-performing loans (NPLs).
“We feel that significant capital impairment from sustained deterioration in asset quality would exert downward pressure on the ratings of standalone-driven Sri Lankan FLCs.”
Fitch said 7 out of 16 Fitch rated finance and leasing companies would need 6.7 billion rupees of new capital to meet regulations requirements of 2.5 billion rupees by January 2021.
“The inability of some small- and mid-sized FLCs to meet interim regulatory requirements has exposed them to regulatory risks, which include having to face deposit caps, lending caps and issuance of Notice of Cancellation of the License,” Fitch said.
“The Central Bank of Sri Lanka has already taken regulatory action in 2019 on several FLCs, which were non-compliant with capital requirements.”
NPL are likely to rise further in the 2020 financial year, though new bad loans will reduce with slower credit growth Fitch said. (Colombo/Nov14/2019)