NBFI sector asset quality gains reversed in June quarter

• Sector gross NPL rate deteriorated to 13.04% by end-June, from 11.29% by end-March 

The asset quality of the non-bank finance company sector (NBFI), which made gains in the quarter ended in March 2021, deteriorated in the following June quarter, falling in lockstep with the banking sector asset quality. 

According to the latest Central Bank data, the NBFI sector gross non-performing advances ratio deteriorated sharply to 13.04 percent by the end of June 2021, from 11.29 percent in March 2021.

The sector gross non-performing loans ratio reached 14.14 percent in June 2020, the highest in recent times, when the pandemic-induced stresses exacerbated the issues already faced by the industry from around 2017, when the higher interest rates started biting into its growth, profits, liquidity and asset quality.

The sector gross non-performing loans ratio, which was at its recent lowest of 4.89 percent in March 2017, deteriorated to reach double-digit levels through the end of December 2019, when it reached 10.59 percent before deteriorating further during 2020, due to the pandemic-induced stresses. 

However, the growth in loans returned during the period of brief economic normalcy in the first three months of 2021, which was made possible by the ultra low interest rates and the effects of regulatory intervention.

While the licensed finance company sector, which has more weightage in the broader asset quality gauge, recorded  a moderate fall in its ratio, from 11.31 percent to 12.99 percent between the two quarters, more vulnerability was seen in the smaller specialised leasing company sector, which saw its gross non-performing loans ratio deteriorating sharply from 11.02 percent to 15.03 percent. 

In comparison, the banking sector asset quality had slipped to 5.0 percent by end-June, from 4.6 percent in the March 2021 levels. 

While the immediate future looks bleak for the growth and asset quality in both the bank and non-bank finance sectors, due to the pandemic’s lingering toll on the Sri Lankan economy, the uptick in interest rates could help the latter in staying more attractive for depositors, as its deposit rates are linked to government securities yields, which are on an uptrend and thereby buttressing its liquidity profiles. 

The Central Bank last week extended the loan moratorium for the pandemic-affected borrowers in the banking sector by another four months and there is an expectation that similar relief would be afforded to the NBFI sector borrowers shortly, which will take some sting out of the sector’s asset quality pressures, due to forbearance under reporting guidelines.