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Sri Lanka’s Asia Asset Finance rated ‘A+(lka)’ with a stable outlook: Fitch

ECONOMYNEXT – Fitch Ratings said it has assigned a First-Time Rating of ‘A+(lka)’ Outlook Stable to Asia Asset Finance.

“Fitch Ratings has assigned Sri Lanka-based Asia Asset Finance PLC a first-time National Long-Term Rating of ‘A+(lka)’ with a Stable outlook,” the rating agency said.

The full statement follows:

Fitch Assigns Asia Asset Finance a First-Time Rating of ‘A+(lka)’; Outlook Stable

Fitch Ratings – Colombo/Mumbai – 07 Feb 2024: Fitch Ratings has assigned Sri Lanka-based Asia Asset Finance PLC a first-time National Long-Term Rating of ‘A+(lka)’ with a Stable outlook.

Asia Asset Finance is a 72.9%-owned subsidiary of India-based Muthoot Finance Ltd (MFL,BB/Stable). Its core business is in gold-backed lending, similar to its parent. Asia Asset Finance has a small market share of 1.6% of total finance and leasing company (FLC) industry assets.

KEY RATING DRIVERS

Shareholder Support Drives Rating: Asia Asset Finance’s rating reflects our expectation that MFL will provide extraordinary support to its subsidiary if required. We believe MFL has the financial ability and incentive to provide support, given its majority shareholding, record of capital infusions and strategic and operational alignment in its subsidiary’s core product – gold-backed loans. This is counterbalanced by Asia Asset Finance’s small size and contribution to MFL, limited brand sharing and different operating jurisdiction.

Limited Role and Contribution: Asia Asset Finance’s rating is constrained by our view of its modest role and contribution within MFL group. This is based on its small size relative to its major shareholder, separate geographical market and regulatory framework, and performance that has been affected by Sri Lanka’s difficult operating conditions. We believe Asia Asset Finance plays a less significant role in MFL’s franchise relative to the parent’s other financing subsidiaries in India, which help to broaden MFL’s franchise in its home market.

Strategic Integration: Asia Asset Finance’s business model aligns with MFL’s core product of gold-backed loans, following its transition from vehicle financing and unsecured loans.
MFL has a clear influence on Asia Asset Finance’s business strategy and maintains oversight of execution at the board level. The shareholder also appoints three non-executive directors on Asia Asset Finance’s eight-member board and has seconded an employee to head its gold-loan internal audit team. Nonetheless, some differences remain due to the entities’ separate jurisdictions and local market practices.

Adequate Ordinary Capital Support: MFL has provided adequate and timely capital support to Asia Asset Finance since it acquired the company in 2014. It infused around LKR400 million in 2019 to support the subsidiary’s business growth. A further LKR413 million was infused in 2021 to meet the increased minimum regulatory capital requirement of LKR2.5 billion for Sri Lankan FLCs, ahead of the stipulated compliance deadline.

Weak Standalone Credit Profile: We consider Asia Asset Finance’s intrinsic credit strength to be significantly weaker than its support-driven rating. This stems from its modest domestic franchise, evolving risk practices, weak execution record and high debt/tangible equity ratio of 7.1x as at end-September 2023. The company’s delinquency ratio also exceeds the sector average, mainly due to significantly higher non-performing loans in its legacy non-gold loan book.

Stabilising Economic Outlook: We expect the operating environment for Sri Lankan FLCs to continue to stabilise following the inflation and interest rate shocks over the past two years. Easing inflation and interest rate pressures should provide steadier conditions for FLC sector performance. Some headwinds linger, as higher taxes will continue to weigh on household finances in 2024. Investor confidence will also take time to recover. Nonetheless, we expect the economic activity to improve in FY25 as GDP growth recovers.

Modest Franchise, Gold-Lending Niche: Asia Asset Finance is a small FLC with around 1.5% market share of industry loans and deposits. It has a niche in gold-backed lending and accounts for around 7% of sector gold loans. Asia Asset Finance derives some benefits from MFL’s domain knowledge in gold-backed lending. However, differences in regulatory frameworks and lending practices between Sri Lanka and India are likely to result in varied portfolio performance relative to MFL’s performance in India.

High Appetite for Gold Loans: Asia Asset Finance’s high gold-loan exposure heightens its market risk due to gold price fluctuations. We regard gold collateral as liquid in terms of recoverability, but this is counterbalanced by Asia Asset Finance’s aggressive risk appetite within the segment. For example, it has a history of elevated loan/value ratios and a high annualised gold-loan growth rate of 56% from FY18 to FY23. Asia Asset Finance plans to diversify into small-ticket mortgages and vehicle loans to ease its concentration risk, but this is subject to execution risk.

Significant Asset-Quality Risks: We expect Asia Asset Finance’s asset quality metrics to remain weak in the near term, as legacy delinquent loans take time to resolve. Some borrowers may also face residual financial pressure after the difficult economic conditions over the past few years. The company’s gold-backed portfolio should mitigate credit losses, due to the typically healthy recoverability of gold collateral, but this may be tested against its generous risk parameters and still challenging operating conditions.

Asia Asset Finance’s 90-day non-performing loan ratio of 24.7% stood above the industry’s 19.9% at end-September 2023, driven by its legacy portfolio.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Asia Asset Finance’s rating is sensitive to changes in MFL’s credit profile as well as our opinion around MFL’s ability and propensity to extend timely extraordinary support. Developments that could lead to negative rating action include:

– Meaningful reduction in the parent’s ownership, control or influence that could weaken its propensity to support the subsidiary
– Notable decline in capital buffers, indicating reduced timeliness in financial support to back growth
– Weakening alignment of Asia Asset Finance’s gold loan practices with its parent’s policies, denoting a lower level of integration
– Sustained underperformance that increases the management and reputational burden for MFL
– Insufficient or delayed liquidity support from MFL that hinders Asia Asset Finance’s ability to meet its obligations in a timely manner

Such developments could significantly reduce shareholder support prospects and, if severe, may lead to the ratings being based off Asia Asset Finance’s standalone credit profile. This would imply a multi-notch downgrade.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

– A significantly greater strategic role for Asia Asset Finance within MFL group
– Closer integration with MFL across broader functional areas
– Greater sharing of the Muthoot brand name besides the gold-loan product

However, we view these developments as less likely in the near-term in light of Asia Asset Finance’s different operating jurisdiction and small size relative to MFL.

Date of Relevant Committee
01 February 2024

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Rating of the entity is linked to its parent’s, MFL, rating.

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LGBTQIA+ Rights: Europe and South Asia See Similar Discriminatory Practices

ECONOMYNEXT – The rights and protections of the LGBTQIA+ community have been fraught with challenges and continue to be so, despite the many gains achieved in recent years.

Nor are those handful of rights universally applied, a recent discussion which looked at the European and South Asian perspectives on same-sex rights and unions revealed. Most developed nations have introduced protections for those identifying as LGBTQIA+, and a view from a distant lens paints a picture of tolerance. Yet, a closer look at the European arena throws up the many gaps that are evident in the application of the law.

In the so-called conservative South Asian nations, changes to legislation are slow to be implemented. That may come as a surprise, for, contrary to popular belief, same-sex relationships were culturally acceptable in the South Asian region and is not a Western concept points out Ruhaan Joshi, a Public Policy Practitioner from India.

Society’s view on same-sex relationships dimmed with the imposition of Western values and the criminalisation of such relationships with the advent of colonial rule.

While the LGBTQIA+ communities in South Asian countries currently battle to have same-sex relationships decriminalised and their unions legally accepted, the irony is that countries that first made such relationships punishable by law have moved on to be more welcoming, though some discriminatory practices continue.

Joshi was part of a discussion themed ‘On Being Queer and LGBTQIA+ in South Asia and Europe, held in Germany on April 9 this year. The discussion which included the release of two papers which examined the rights and protections of the LGBTQIA+ community in Europe and South Asia, respectively, was organised by the Friedrich Naumann Foundation for Freedom.

Joining Joshi in the discussion were lawyer and parliamentarian Premnath C Dolawatte from Sri Lanka, Milosz Hodun, President, Projekt Polska Foundation, Poland, Michael Kauch, a Member of the European Parliament and RENEW Europe Group and Inaya Zarakhel, a Dutch-Pakistani actress and an activist on Queer Rights, who moderated the discussion. The two papers were presented by Hodun and Joshi, respectively.

In his opening remarks, Kauch pointed out that while the view of the liberals is that the rights recognized in one member nation of the EU must be accepted by all member countries, that is not the ground reality, the issue of Rainbow families being a case in point.

In the context of the European Union, though the Court of Justice has ruled on the freedom of movement of those in same-sex partnerships and their families, the ruling is not universally applied by member nations.

In Italy, and some European nations, surrogacy which helps childless couples to become parents is illegal. In other situations where same-sex parents are of different nationalities a child in that union faces restriction of movement or the possibility of being stateless if one parent hails from a country where such parental rights are not recognised.

Hodun meanwhile stated that in Poland transgender persons must first sue their parents for the gender assigned to them at birth, to have their gender marker changed on documents.

Some countries such as Russia and Azerbaijan resort to State-sponsored homophobia, and in many instances politicians and political parties promote such biases to boost their voter base it was pointed out. Even where laws are in place for the protection of LGBTQIA+ rights, there is no political will to implement them.

In Europe where migrants arrive in droves seeking asylum, and are frowned upon by many of those countries, LGBTQIA+ members face even more discrimination Hodun says, both by other refugees and governments, where most often the state ignores the situation despite the guidelines issued by the UN and the European Court of Justice. Hate speech and hate crimes too are on the rise he adds stating that at least 80 per cent go unreported.

Increasingly the LGBTQIA+ community has experienced a diminishing of their safe spaces as right-wing and populist governments are elected across the globe. Taking a dig at feminism, meanwhile, Kauch states that though feminists uphold a woman’s right to opt for an abortion, they take a different approach on the topic of surrogacy.

Dolawatte who waded into unchartered waters when he presented a Private Member’s Bill to decriminalise same-sex relationships through an amendment to section 365 of the Penal Code and the repealing of section 365A in its totality, is hopeful that the Bill will pass its third reading. It’s been an uphill battle he says, referring to the case filed in the Supreme Court against the Bill. The court ruled in his favour.

He had little or no support from his own party members, but says the President of the country, and younger party members are with him on this issue. Apart from making Sri Lanka a safe space, it would encourage foreign nationals identifying as LGBTQIA+ to visit without fear, and thus boost tourism he opines.

As Joshi states society has come a long way from when LGBTQIA+ were made fun of and were subject to violence to the positive portrayal in movies. Such movies are also well-received by society. Transgender identity has a distinct recognition in South Asian religious beliefs. Hijra, Khwaja Sara or Kinnar are some names given to transgender folk and they have, since ancient times been an accepted group in society. On the one hand, there’s Afghanistan and the Maldives which make no allowances for the LGBTQIA+ community, while Nepal became the first South Asian nation in 2023, to register a same-sex marriage, Joshi states. In most South Asian nations, the courts have ruled in favour of relaxing the rules against this community, and, like in Europe, it is the governments that drag their feet.

For governments to change their stance, society must take the lead in fighting for the unconditional dignity of the individual, freedom of movement, and safeguarding the tenets of democracy, he says adding that it must also run parallel with the LGBTQIA+ community looking beyond themselves at issues that impact democratic values, and the societal restrictions non-LGBTIQIA+ groups face, such as opposition to inter-caste marriage and the right to adopt outside their caste systems and equal access to many other privileges.

While the panellists advocated working together across the global divide as a step towards achieving equal rights for all, Dolawatte also called for caution; too much pressure on such issues from Europe he said may not be welcome, and must be handled with care.

With right-wing and populist governments getting elected across the globe, Kauch claims the forthcoming EU elections will prove crucial in deciding how future and current governments ensure tolerance and diversity amongst their citizenry.

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Sri Lanka making new economic laws to embed structural reforms

ECONOMYNEXT – Sri Lanka is making new laws and also revising old legislation following a comprehensive review of past experience and lessons learned, Treasury Secretary Mahinda Siriwardana has said.

Most of these new laws focus on structural changes of the existing executive and administrative structures, Siriwardana was quoted as saying in a speech to ministry officials on April 08.

The laws related to public finance, procurement, public private partnerships, state enterprises and also a law on the offshore economy.

The following new laws are being made:

a. Public Financial Management Bill
b. Public Debt Management Bill
c. Economic Transformation Bill
d. Management of State Owned Enterprises Law
e. Public Private Partnership (PPP) Law
f. Investment Law
g. Public Procurement Bill
h. Unified Labor Law Bill
i. Food Security Bill
j. Public Asset Management Bill
k. Microfinance and Credit Regulatory Authority Bill
l. Secured Transaction Bill
m.Offshore Economic Management Bill
n. New law for facilitating proposed agricultural land lease programme
Public Service Employment Bill
o. Sri Lanka Accounting and Standard Monitoring Act

Changes are planned to the following laws

a. Amendments to Agrarian Development Act
b. Amendments to Excise Ordinance
c. Amendments to Customs Ordinance
d. Amendments to Finance Act
e. Amendments to Foreign Exchange Act. Colombo/Apr15/2024)

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After PM’s Chinese visit, US NSA talks to Sri Lanka President’s advisor on peace, security

ECONOMYNEXT – The United States National Security Advisor (NSA) Jake Sullivan held talks with Sri Lanka President’s Senior Advisor on National Security Sagala Ratnayaka focusing on regional security issues this week.

The conversation between the two comes days after Sri Lanka Prime Minister Dinesh Gunawardena ended an official visit to China in which he met President Xi Jinping and his counterpart Li Qiang in Beijing amid discussions over further investments in Sri Lanka and concerns over banning Chinese research ships.

The United States along with India is highly concerned over increasing Chinese influence in Sri Lanka, which is located in a strategic location in the Asia.

China already owns a port and a proclaimed land next to the main Colombo port in Sri Lanka and analysts say the Beijing’s ownership of assets has raised doubts if China is planning to use Sri Lanka as a military base. China has denied this and said its relationship with Sri Lanka is only based on commercial aspects.

The discussion between Sullivan and Ratnayaka focused on a range of crucial topics aimed at bolstering bilateral relations between the two nations, the President’s Media Division (PMD) said.

“Central to their discussion was the unwavering U.S. commitment to supporting Sri Lanka’s security and sovereignty,” the PMD said in a statement.

“Acknowledging Sri Lanka’s ongoing endeavours, Sullivan emphasized the importance of completing the fiscal, monetary, and governance aspects of the IMF program.”

The US along with India has raised possible threats of increasing Chinese influence in Sri Lanka, government officials have said. Both  countries see China as a security threat to the Indian Ocean region, they say.

“The conversation also delved into future prospects for collaboration between the two countries, exploring avenues for enhanced cooperation in various spheres,” the PMD said.

“Sullivan conveyed his keen interest in fostering continued engagement with Sri Lanka, underscoring the mutual objective of advancing peace and security in the region.”

“This dialogue marks a pivotal moment in U.S.-Sri Lanka relations, demonstrating a shared commitment to promoting stability and prosperity in the Indo-Pacific region.” (Colombo/April 13/2024)

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