Sri Lankan finance companies face tough times

Sri Lanka’s over-crowded finance company sector is undergoing tough times as the slow down in sector growth is expected to continue amid Central Bank’s regulatory action including the policy measures, says the head of the Finance Houses Association (FHA).

Policy measures taken to curtail importation of vehicles with the introduction of the Loan to Value Ratio and imposition of caps on deposits and borrowings on companies have weakened capital positions of finance companies, Kithsiri Wanigasekara, FHA Chairman told the Business Times.

The association has made its submissions to the Treasury to change the LTV ratio to increase the profitability and reduce the pressure on the capitalisation of finance companies, he divulged.

In addition, increased interest rates on deposits and borrowings also had a significant impact on finance company growth; he said adding that operational conditions are moving towards tough times due to over- crowding in non- bank financial institutions (NBFI).

The NBFI sector accounted for Rs. 1239.1 billion in total assets as at March 31, 2017 that grew by 15 per cent, he disclosed pointing out that declining profitability due to higher funding and credit costs could in return pressure capitalisation of 47 finance companies with 1321 branches countrywide.

Total loans and advances registered a growth of 18.2 per cent to reach Rs. 990 billion as at March 31. Deposits held by Licensed Finance Companies (LFC) at this time increased by 13.9 per cent to Rs. 558 billion and borrowings grew by 16 per cent to Rs. 435 billion, the FHA annual report revealed.

The Central Bank strengthened the regulatory process during the year with the issuance of two key directions. The Finance Companies (Minimum Core Capital) Direction No 2 of 2017 requires all LFCs to maintain a minimum Core Capital of Rs. 1 billion by January 2018 with an increase of Rs. 500 million each year to reach a minimum of Rs. 2.5 billion by January 2021.

This was done with a view to encourage consolidation and to ensure safety and soundness of LFCs, he said pointing out that Finance Companies ( Loan to Value Ratio for Cre d i t Facilities in respect of Motor Vehicles) Direction No. 1 of 2017 issued on January 13, 2017 was amended on February 17 and June 2 incorporating provisions that were beneficial to the sector.

However, the comparatively low LTV ratio of 50 per cent applicable to motor cars, vans and SUVs in addition to 25 per cent on three- wheelers continues to make a negative impact on the growth of the sector with secured lending, he complained.

The association continues to make submissions to the Ministry of Finance seeking an increase in the LTV Ratios for most vehicles, he said.

The imposition of limitations o n ve h i cl e and three-wheeler lending has seen a shift in demand towards motorcycles for finance leases by major players in the market. Finance leases on motorcycles continue to remain an attractive market in terms of returns and profitability, he pointed out.