In a June 2013 report, titled “Standpoint Commentary: Licenced Finance Company Sector Update”, the ratings agency also signalled that “many players sought to diversify their lending portfolios, thus channelling funds to micro-credit loans and pawn brokering.
Going forward, the easing of interest rates and inflationary pressures are expected to result in a gradual uptick in demand for credit. While vehicle financing is expected to remain the main growth driver, other credit assets such as pawning and microfinance are expected to gain in prominence within the loan mix”.
Further, RAM also opined; “Unfavourable macroeconomic conditions and the seasoning of loans subsequent to the aggressive loan growth witnessed the previous year had resulted in a deterioration of credit quality. As LFCs cater to a social stratum whose risk profile is higher than that of a bank’s clientele, the impact of the unfavourable macroeconomic environment had been magnified in the sector. In the short term, delinquencies are expected to increase as loans have yet to season and the sector continues to be challenged to maintain credit quality; overall asset quality, therefore, is expected to remain at current levels. In the longer term, however, we expect asset quality to be supported by better macroeconomic conditions, resulting in reduced incidence of non-performing loans (‘NPLs’) and improved recoveries”.
The report also revealed that, overall, “margins had narrowed as funding costs increased amid a faster re-pricing of shorter-tenured deposits in a high-interest rate scenario. However, the sector’s yields stood higher than that of banks, thereby resulting in wider margins.
Increased lending to lower-income earners in the form of micro-finance loans had also given rise to lucrative margins. Notably, a strengthening of core income was witnessed as the bulk of funding was channelled to interest-earning credit assets.
This is viewed positively in light of the volatility of returns from non-core assets such as real estate and equity investments. Going forward, while easing interest rates are expected to result in broader margins, the benefits are expected to be offset to some extent by a probable increase in credit costs as new NPLs trickle in with the seasoning of loans”.
It also emerged that, “while customer deposits continued to be the sector’s chief funding source, the funding mix increasingly tilted towards borrowings. Given the removal of withholding tax (‘WHT’) on listed debentures and the benefits associated with funding via long-term debt such as the easing of inherent maturity mismatches, we expect a further tilt towards corporate debt.
Moreover, the interest rate caps on medium-term deposits ranging from 2-3 years – effective January 2013 – may result in LFCs increasingly relying on longer-term borrowings. However, the funding mix is expected to remain dominated by deposits. Meanwhile, liquidity levels are expected to remain stable amid the gradual uptick in credit demand”. (JH)