June 12, 2013 (LBO) - Sri Lanka's licensed finance companies (LFC), which play in the sub-prime market has cut exposure to property and stocks, though they are facing an uptick in non-performing loans amidst a downturn, a rating report said.
Investments in land and property had fallen to 1.86 percent of assets in the 9 months to December 2012, after peaking at 8.6 percent in 2009, RAM Rating Lanka said in a report on Sri Lanka licensed financed companies.
In 2010 investments in land and property was 8.4 percent, but in 2011 it had fallen to 6.11 percent and by 2012 March investments in land had fallen to 2.8 percent.
"We also note that many LFCs reduced their stakes in equity investments in favour of interest-yielding assets, given the downturn in the equity market," RAM Ratings said.
RAM said the fall was a combination of selling down land and property and channeling cash mostly into interest bearing credit.
There was also an increase in total assets in 2013 in the sector with several licensed finance companies, including People's Leasing, Sri Lanka's largest non-bank lender migrating into in to a finance company.
In the year to March 2013 credit growth had slowed as interest rates rose and the state jacked up taxes in motor vehicles from April 2012.
Credit assets had grown 31.3 percent in the nine months to March 2013, down from 56.7 percent excluding the migrated leasing companies.
Excluding the new companies, vehicle financing had grown just 14.6 percent in the nine months to March.
"With the weaker demand for vehicle financing, we note that many players had focused on other loan products such as micro-financing and pawning (gold-backed loans)," the report said.
Finance companies were offering higher loan-to-value ratios than bank up to 75 to 85 percent of the collateral which made them likely to higher losses as gold prices dropped. Amid stronger competition, margins had also dropped on pawning the report said.
"Additionally, the segment faces risks such as the acceptance of dud articles, albeit minimal," the report said.
"However, we note that the sentimental value attached to jewellery has afforded good collection rates in the past."
Finance companies had also increased micro finance, which had high interest margins but no collateral.
"This further exacerbates the risk profile of the LFC sector, which is inherently exposed to a high degree of credit risk compared to banks," RAM Ratings said.
"Despite the risks associated with micro-financing, many LFC players view it as a lucrative loan product which yields higher."
RAM Ratings said the NPL ratio was 5.79 percent by end December 2012, almost unchanged from 5.91 percent in March (6.79 percent without the migrated leasing companies), but fast credit growth over the past two years expected to bring up new delinquencies.
"Going forward, in the short to medium term, delinquencies are expected to increase as loans have yet to season," the report said.
"However, given easing interest rates and lower inflation as forecasted by the CBSL, improved credit quality could be expected in a better macroeconomic environment, resulting in fewer new non-performing loans and improved recoveries."