Sour loans mount at finance firms with adoption of riskier business models

„NPL ratio shoots to 5.8% from 4.9% in Dec. 2017 „Fitch says diversifying of product portfolio to unknown territories key reason „SL has 51 non-bank finance firms with assets of Rs.1.35tn

The deteriorating asset quality appears to be a common phenomenon with Sri Lanka’s banks and non-banks but the intensity of the problem of the latter suggests that the ailment runs deep.

Sri Lanka’s highly dispersed and untidy nonbank sector reported a higher gross non-performing loans (NPL) percentage of 5.8 percent by March 31, 2018, up from 4.9 percent in December 2017.

According to Fitch Ratings, this was a result of the change in the business mix of the finance companies to a more challenging one from the easier vehicle leasing business.

It was only yesterday Mirror Business reported that the banking sector gross NPL ratio had weakened to 3.3 percent by end-may, from 3.0 percent at the beginning of the year and loans worth Rs.65 billion had fallen into the nonperformance category during the first five months.

Sri Lanka’s finance companies were forced to shift their business mix to segments they did not have experience to stem the competition from banks on its vehicle finance business.

“Competition in leasing from banks and a deceleration in vehicle financing has pushed finance companies to look beyond their core businesses and venture into term financing, microfinance and lending against gold,” Fitch Ratings said.

The rating agency this week affirmed the ratings of nine large and mid-sized finance companies and downgraded the rating of one company.

Since of late, Sri Lanka’s finance companies have been diversifying their product portfolio to offset the revenue losses from the highly competitive vehicle leasing business.

But the portfolio risk has increased in tandem due to the absence of poor-quality collateral, challenges in recoverability in collateral and the lack of experience in the new segments, Fitch noted.