• However, cautions SL’s economic recovery remains fragile and is highly dependent on progress of its economic reform programme

Sri Lanka’s finance and leasing companies (FLCs) are set to benefit from the country’s economic recovery, moderating inflation and lower interest rates, Fitch Ratings said in a recent report, projecting improved performance for the financial year ending March 2025 (FY25).

The sector’s loan growth is expected to shore up by the gradual relaxation of vehicle import restrictions that have been in place since 2020 to safeguard Sri Lanka’s foreign reserves.

Following six quarters of contraction, the economy returned to growth in the fourth quarter of 2023, while the monetary conditions have eased significantly. As inflation and interest rates normalise and economic activities revive, demand for credit, particularly in the vehicle financing segment, has picked up.  The FLC sector loan growth is expected to expand by an estimated 9.6 percent year-on-year in the first quarter of FY25.

“We expect asset quality to improve further on recovering borrower repayment capacity and the FLCs’ focus on loan recoveries. The industry’s 90-days past due non-performing loan ratio eased to 13.6 percent by 1QFY25, from 17.8 percent at end-December 2023. 

Profitability will be supported by lower funding and credit costs, with return on assets rising to 5.5 percent in FY24, 
from 3.0 percent in FY23,” Fitch noted.

However, Fitch cautions that Sri Lanka’s economic recovery remains fragile and is highly dependent on the progress of its economic reform programme. Any significant setbacks could pose risks to the sector’s growth, asset quality, earnings and standalone credit profiles.

“The ratings implications will depend on whether the ratings are driven by the entities’ standalone credit profiles or external support, taking into account relativities with other rated entities in Sri Lanka,” Fitch added.