Waning finance company asset quality under spotlight

„ICRA Lanka estimates 100 bps rise in NPLS to 5.82% „Cites sour loans to SME sector as key reason „Observes significant slowdown in portfolio growth „Believes slowdown in lending due to higher capital requirements

The asset quality of the non-bank finance sector is not something which often comes to the fore or commented on. But with the economic conditions getting tougher, it is slowly coming into the spotlight.

As the economy wobbles and adverse weather affecting hundreds of thousands in the main agricultural regions, curtailing their repayment capacity, Sri Lanka’s finance companies have begun to feel the brunt with their sour loans climbing up fast.

The credit rating firm, ICRA Lanka, recently measured Sri Lanka’s nonbank finance sector’s gross non-performing loans rising by 100 basis points during the 12 months to March 2018, to 5.82 percent. ICRA Lanka, a unit of Moody’s Investors Service, pointed out that during the last couple of years, the finance companies increased their exposure to the small and medium enterprise (SME) segment due to the relatively better yields and challenging market dynamics on the traditional vehicle leasing segment.

The finance companies granted loans to SMES in the form of post-dated cheque discounting and short-term loans.

“However, we observe increasing slippages in these product segments of the SME portfolios as the macro conditions were challenging,” ICRA Lanka said in a special note on the asset quality of the country’s finance company sector.