Thursday, 09 April 2020 09:31

Covid-19 exerts additional pressure on Sri Lankan FLCs

The corona virus outbreak and the resultant prolonged business disruptions will put additional pressure on Sri Lankan finance and leasing companies' (FLCs) earnings and asset quality, says Fitch Ratings.

The ultimate economic and financial market implications of the outbreak are unclear, while Fitch considers the risks to NBFIs' credit profiles to be clearly skewed to the downside.

Fitch expects Sri Lanka FLCs to face multiple challenges in the near team, including muted loan growth, margin compression amid lower interest rates, and rising loan-impairment charges due to asset-quality pressures.

"We believe that there could be a fall in loan growth in 4QFY20 (ending 31 March 2020), with growth already sluggish up to end-3Q20 (yoy decline of 0.9% in gross loans). The degree of recovery in FY21 will depend largely on the duration and severity of the virus outbreak," the rating agency said.

The Central Bank of Sri Lanka (CBSL) has announced further relief for COVID-19-affected businesses, and individuals are to be offered similar relief by FLCs as those offered to customers of banks, including debt moratorium. We believe that these have mixed implications for FLCs.

A one- to six-month debt moratorium, depending on the type of credit line, will have negative first-order implications for FLCs, but a reduction of the liquid-asset requirement for deposits and borrowings could reduce near-term liquidity shocks stemming mainly from non-payment of loan rentals.

"Furthermore, we believe the debt moratorium will exacerbate pressure on FLCs' profitability which is already weakened, and is likely to mask the extent of asset-quality deterioration," Fitch said.

In addition, the timeline to comply with enhanced minimum core capital and minimum capital-adequacy ratio requirements has been extended by one year.

This will provide some breathing space to FLCs that have not met the relevant thresholds due to dislocation of the capital markets, while significant near-term earnings pressure may weigh on FLCs' capital buffers.

Out of the Fitch-rated FLCs, five had not met the minimum core capital requirements of LKR2 billion (USD11 million) by 1 January 2020.


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