ECONOMYNEXT – Sri Lanka’s Finance Leasing Companies have been hit by import controls as new car imports were banned, Fitch Ratings said, while second hand prices had also surged.
“Higher second-hand vehicle prices due to limited new vehicle supplies have reduced affordability and will most likely weaken future demand for vehicle financing,” Fitch said.
Instead of raising rates to half money printing and restore monetary stability, Sri Lanka has banned vehicle imports and now also restricted underwear and electronic items.
Fitch believes the ban is likely to remain in effect at least until the end of 2022.
“This has caused surging demand for second-hand vehicles, inflating prices by around 50 percent depending on vehicle type,” the rating agency said.
“The higher prices have supported loan recoveries from repossession in the near term, but may expose FLCs to unexpected sharp price corrections.”
The industry’s total loans had contracted 2.2 percent in the year to June 2021 marking the fifth consecutive quarter of loan contraction for the industry, Fitch said.
The sector non-performing loans ratio, based on loans over six months past due, had climbed to 13.0 percent by June against 7.7 percent at March.
Profitability measured by annualised return on assets had fallen to 1.8 percent in 1QFY22 from 2.8 percent in FY19 due to higher credit costs and declining top-line revenue.
“Capitalisation and liquidity metrics remained relatively stable due to the limited growth opportunities,” the rating agency said.
“We believe Fitch-rated standalone FLCs largely possess adequate profit and capital loss-absorption buffers relative to their rating levels to absorb higher credit costs, with the exception of Bimputh Finance PLC (B-(lka)/Rating Watch Negative). ”
“Its sustained losses continue to erode its capital base. Still, FLCs’ credit profiles are highly susceptible to the strength of the economic rebound, which could determine their ability to arrest deterioration in asset quality. ”