Sri Lanka finance companies pressured by capital needs as bad loans rise: Fitch
ECONOMYNEXT – Sri Lanka’s finance and leasing companies are under pressure to raise capital and regulatory thresholds rise and bad loans pick up, which may also trigger mergers, Fitch Rating said.
By 2021, finance and leasing companies (FLCs) should have a capital of 2.5 billion rupees, from the currency 2.0 billion rupees.
Loans at sector companies had grown only 0.5 percent in the year to September 2019, against a 12.9 percent rise from 2015 to 2018.
Non-forming loans of the sector which had peaked at 7.56 percent after a currency collapse in 2013/2013 fell to 5.14 by March2016, central bank data shows.
Two currency collapses then came in rapid succession in 2015/2016 and 2018, triggering two busts in a row. Bad loans in the sector had risen to 9.69 percent, in part due to weak loans growth.
Non-performing loans were at 9.86 percent at finance companies by September 2019, and 4.47 percent at specialized leasing companies.
Meanwhile Fitch said finance and leasing companies may not be able to boost profits, as economic growth may remain weak.
“This could impede efforts to meet enhanced regulatory capital requirements by generating capital internally or by raising capital externally,” Fitch said.
“We believe this risk will be higher for smaller standalone finance companies.
“Those FLCs that have raised external capital recently, as part of efforts to meet the higher capitalization standards, have benefited mainly from support from their major shareholders.
“The tough operating environment may also impede consolidation, as asset-quality issues and limited near-term growth prospects for the sector could make M&A less attractive.”
Fitch said the central bank was unlikely to delay deadlines for raising capital.
In 2019, the regulator cancelled licenses held by TKS Finance and issued a notice of cancellation for the license held by The Finance Company and Sinhaputhra Finance. Sinhaputhra had been given more time to get capital.
Among Fitch-rated finance and leasing companies, the regulator has also imposed a deposit cap on Dialog Finance (AA(lka)/Stable), Bimputh Finance (BB-(lka)/Stable), Ideal Finance (B+(lka)/RWP) and Abans Finance (BB+(lka)/Stable) due to their non-compliance with the interim thresholds.
FLCs accounted for 7.6 percent of total financial system assets at end-2018.
The top 10 FLCs accounted for 69 percent of the sector assets at end-September 2019, with 33 smaller FLCs representing the remaining 31% percent.
The CBSL has sought to reduce risks by raising capital thresholds to encourage consolidation. (Colombo/Mar02/2020)
Kithmina Hewage- Institute of Policy Studies