Non-bank finance sector NPLs hit over 16% of total loans

• ICRA Lanka says they observe construction sector challenges cascading down to NBFI sector

Asset quality troubles with Sri Lanka’s non-bank lenders could go deeper with their non-performing loans (NPLs) estimated to have reached 16-18 percent by end-June as the sector is reeling from a multitude of challenges exacerbated by the pandemic-induced hardships. 

Sri Lanka’s non-banking finance company sector NPLs reached 11.37 percent of the sector’s total loans outstanding by end-March, up from 10.59 percent in December 2019 and 7.71 a year ago. 

ICRA Lanka Limited, a part of Moody’s Investors Service said they had observed, “…the construction sector challenges cascading down to the NBFI sector, through small contractors, subcontractors, and other suppliers to the large construction companies as well.”

 “The asset quality deterioration of the NBFI sector is much sharper than that of the banking sector,” the rating agency stated. 

Non-bank finance companies typically carry higher non-performing loans compared to banking sector counterparts as the former undertakes higher risks as they often lend to segments which could become easily vulnerable to economic shocks and are often ignored by the banking sector. 

The banking sector NPL ratio for the similar period was reported at 5.1 percent, up from 4.7 percent in December 2019, but the unofficial data suggests that the sector NPLs have also reached 5.6 percent by end-May.  “Traditionally, the finance companies in Sri Lanka cater to the informal and relatively vulnerable segments such as self-employed individuals, micro-businesses, SMEs. These segments are among the hardest hit segments due to the COVID crisis,” ICRA Lanka stated in a report. 

The sector in July urged the regulator to provide them with some forbearance on certain statutory requirements such as liquidity so that it could at least become relatively competitive in the lending space where the banks dominate currently.

At the onset of the pandemic, the regulator gave a string of relief to the sector by way of forbearance measures in the areas of capital, liquidity and statutory returns to help support the sector, “as a temporary step giving due consideration to the imminent threat faced by LFCs and SLCs,” the Monetary Board said. 

Along with the move, the Monetary Board also gave the sector a deferred time frame for the enhancement of minimum capital adequacy requirements applicable for 
LFCs and SLCs. 

As a result, the original time lines set for July 1, 2020 and 2021, respectively, have been extended by one year.

The non-bank finance sector also called the Central Bank to make them partners of the latter’s refinance scheme and the subsequent interest subsidy and credit guarantee schemes to make the playing field level for them too. The sector with Rs.1.3 trillion assets was already under pressure even before the pandemic-induced hardships as their earnings, growth and asset quality were on a weaker footing.