Sour loans...

Sri Lanka operated with 51 non-bank finance companies with assets of Rs.1,355 billion by end-2017, representing 7.9 percent of the financial system.

The credit expansion in the sector slowed down to 9.8 percent in 2017, from 21 percent in 2016, as the sector could not overcome the challenges stemming from higher interest rates, taxes and macroprudential limits on credit.

Meanwhile, Fitch Ratings downgraded Melsta Regal Finance Limited’s national long-term rating to ‘B’ from ‘A+’ with a Stable outlook.

The plunge in the rating of Melsta Regal comes after its former parent Melstacorp PLC, the owners of Distilleries Company of Sri Lanka PLC, shed its entire stake in the company in March.

Fitch said that they cannot rely on Fairfax Financial Holdings Limited, the new parent of Melsta Regal, with effective control of 70 percent via Bluestone1 (Private) Limited—an SPV established for the acquisition—to provide support, when needed.

“The resolution of the ‘Rating Watch Evolving’ and downgrade of Melsta Regal Finance’s rating to reflect its standalone profile is because the agency views that support from the parent, Fairfax Financial Holdings Limited (Fairfax), cannot be relied upon,” the rating agency said.

Fitch believes Fairfax’s stake in Melsta Regal Finance is part of its portfolio of investments and does not have a strategic significance.

“As such, MRF’S standalone profile is characterized by an evolving business model and small franchise (0.5 percent of sector assets at end-march 2018). The rating also captures potential pressure on MRF’S asset quality from its unseasoned loan book.”