Sri Lanka's Finance Companies on the rocks

by Staff Writer 21-10-2020 | 2:01 PM

Colombo (News 1st); The risk of a second COVID-19 wave, together with weak borrower sentiment in an already fragile operating environment, would put further stress on Sri Lankan finance and leasing companies’ credit profiles, adding to existing pressures on asset quality and profitability, Fitch, in a special report said on Oct 21.

Fitch expects Sri Lanka’s real GDP to contract by 3.7% in 2020 due to the pandemic. The economic fallout has pressured the FLC sector’s asset quality with the six-months past due non-performing loans (NPLs) ratio spiking to 14.1% by end-June 2020.

Fitch warns that a prolonged restriction on vehicle importation and the resultant surge in second-hand vehicle prices are likely to hamper Sri Lankan FLCs’ medium-term growth prospects.

The sector’s loans contracted by 0.2% YoY during the 1

^st

quarter of FY 2021, and leasing and hire purchases accounted for 55% of the sector’s lending.

According to sector analysts, over 70 percent of the sector’s lending book includes loans that are Asset-Backed via vehicles. The lower and attractive interest rates offered by banks and restrictions imposed on vehicle imports, which have led to an increase in vehicle prices, will continue to affect the leasing sector adversely.

The profitability of the Non-Banking Financial Sector has plunged to a five-year low as of March 2020. Sector returns have also plunged to 6.6 percent this year, almost half of last year’s figure, and the lowest since 2014.

The Non-Banking Financial Sector has also been affected by the slower than expected economic growth in Sri Lanka. In line with the declining GDP growth, private credit reached 4 percent in 2019 while NBFI credit turned negative at -3 percent.

Following the outbreak of COVID-19, the NBFI sector’s NPLs spiked to 14.4 percent by the 2nd quarter of 2020.