ICRA Lanka...

In anticipation of possible strain on liquidity in the sector from sudden withdrawal of deposits and non-repayment of loans, the Monetary Board took some proactive measures such as reduction of the mandatory minimum liquidity asset requirements and opened the access to Sri Lanka Deposit Insurance and Liquidity Support Scheme with acceptable collaterals.

The Monetary Board further gave a one-year reprieve on the minimum capital by finance companies.

However, subdued loan growth in the sector, which is expected to prolong through the end of this year, “will provide some comfort from a liquidity point of view, for the finance companies,” ICRA Lanka, which is part of Moody’s Investors Service said.

During the 12 months to December 2019, the NBFIS sector loan growth has been a negative 2.7 percent and the rating agency expects that trend to continue in the short to medium term.

Meanwhile, ICRA Lanka also expects a significant deterioration in the sector asset quality in the ongoing quarter although the debt moratorium will prevent a larger portion of these facilities being classified as non-performing.

“Regardless of the NPA classification, the fundamental asset quality of the segment will significantly deteriorate, as a result of the crisis. Also, the recovery of the same is likely to take longer, as witnessed after the April 2019 Easter events,” it added.

According to data, the licensed finance company sector gross nonperforming loan ratio as of December 2019 was close to 10.8 percent compared to 9.2 percent in June 2019—the quarter ended immediately after Easter attacks.

What makes the sector more vulnerable to asset quality risks than the banking sector is that finance companies cater to the informal and relatively vulnerable segments of the economy such as self-employed individuals, micro businesses and SMES, whose income levels are largely volatile to economic events and COVID-19 has amplified that volatility.

On the minimum capital levels of the sector, ICRA Lanka is of the view that meeting the capital levels even at the deferred time lines would be a major hurdle for the sector given the challenging macro environment.