Finance company sector reverses bad spell but not totally out of woods

The non-bank finance institutions in the country improved their asset quality and earnings in lockstep with their banking counterparts riding on a solid growth in the economy in the first quarter, but the sector is not completely out of risks as it still carries non-performing loans over 10 percent of its total loans. 

According to the data parsed on the licensed finance and specialised leasing companies, the gross non-performing loans ratio, a key gauge of asset quality improved to 11.30 percent by the end of the first quarter in 2021 from 13.86 percent in December 2020. 

Weak asset quality has been a nagging issue for the sector since around 2018 when the ratio started rising continuously before coming to a head in 2020 as the pandemic exacerbated its woes. In June the sector reported gross non-performing loans ratio of 14.14 percent, the highest in recent times. 

However the regulatory interventions by way of payment holidays extended to the pandemic affected borrowers, forbearance on capital and liquidity requirements followed by robust economic recovery in 1Q21 helped the sector to blunt its weaknesses and return to a recovery path. 

However it is yet to be seen how fresh restrictions on the economy which engulfed through 2Q21 would have affected those advances made by the sector. 

The sector also joined to provide fresh relief through August this year as part of the fourth round of moratoriums granted by the Central Bank to affected borrowers.  Reflecting the improving prospects through higher earnings, the sector more than doubled its Return on Equity to 12.46 percent by the end of March 2021 from 5.04 percent in December 2020. 

The return on assets, another barometer for sector profitability and efficiency rose to 3.21 percent from 1.67 percent three months ago. 

The regulatory liquid assets ratio slipped to 8.77 percent for the sector from 9.17 percent in December 2020 reflecting acceleration in the pace of growth in loans.  At the onset of the pandemic last year, the Central Bank gave some reprieve on minimum liquid asset requirement and the capital to blunt the impact of the pandemic on the sector. 

The capital adequacy levels little changed during the quarter as the sector’s core capital adequacy ratio and the total capital adequacy ratio ended at 14.27 percent and 15.55 percent respectively compared to 14.51 percent and 15.66 percent as at end December last year. 

Fitch Ratings recently projected 10 percent of annual average asset growth in the medium term for selected finance companies which are part of large conglomerates.