NBFI sector asset quality weakens as borrowers struggle to service loans

• Sector gross non-performing loans ratio deteriorated to 17% at end-June from 9% in end-March

Sri Lanka’s non-bank finance companies are reeling with record high loan defaults as the sky-high rates triggered by the economic crisis are sending ripple effects across the sector, which briefly showed signs of recovery from the pandemic-induced pressures until the first quarter of this year. 

The sector asset quality as measured by the gross non-performing loans ratio deteriorated to 17.22 percent in the June quarter from 9.11 percent recorded for the March quarter, undoing the much difficult progress made by the sector which was traditionally susceptible to even tiny shocks to the economy.  

The June ratio marked the highest by the sector compared to the available records dating back to December 2013, when the ratio was at 6.69 percent. 
The non-bank finance companies are typically more prone to economic shocks than banks, which are relatively more robust but the magnitude of the economic crisis in 2022, had taken a bigger toll on both sectors, specifically in their asset quality.  The soaring rates and the demand destruction policies adopted since April this year pushed many micro and small businesses out of business triggering a wave of defaults as they continuously missed their loan installments. 

On other hand, loan growth came to a standstill as they closed lending spigots to contain further fallout on asset quality from the weaker profiles of prospective borrowers in an economy where prices are soaring.  
The relatively bigger and stronger sub-sector under the non-bank finance companies—licensed finance companies— saw their gross non-performing loans ratio nearly doubling to 17.20 percent in June from 8.99 percent in March while the specialised leasing company sector saw its ratio increasing to 17.96 percent from 13.72 percent in March. 

Meanwhile, the return on equity, which measures the earnings strength of the sector, also weakened significantly between the two quarters.  For instance, the return on equity which was at 20.48 percent by March 2022, fell by nearly two thirds to 7.85 percent by June.