Friday March 13, 2020 05:28:36
ECONOMYNEXT – Profits and capital of Sri Lanka’s Finance and Leasing Companies (FLCs) would be dented when tighter rules on bad loan provisions come into effect from 2021, Fitch, a rating agency says.
FLCs should recognize non-performing loans (NPLs) in arrears for over 120 days from April 01, 2021 compared to the current 180 days and over 90 days from April 01, 2022.
Bad loans are now 10.6 percent of FLC assets and are much higher at 90-day level, the rating agency said.
“Tighter regulation in Sri Lanka on classification and measurement of credit facilities for finance and leasing companies (FLCs) will accelerate recognition of bad loans in 2020-2022, which is likely to exert pressure on FLCs’ capitalisation due to the knock-on effects on their profitability,” Fitch said.
“Nonetheless, the more stringent norm will strengthen reporting standards and transparency, contributing to the sector’s stability in the longer term.”
Sri Lanka has been hit by worsened monetary instability from 2015, involving two currency crises in close succession and deliberate depreciation through real effective exchange rate targeting in 2017 which led to the rupee’s soft-peg collapsing from 131 to 182 during the period, analysts have said.
The currency collapses had killed domestic demand, triggering bad loans, destroyed real capital and structurally pushed up interest rates. Persistent of loss of credibility of the peg had also driven foreign capital out.
“The changes could increase FLCs’ regulatory NPL ratios during the transition period as the weak operating environment would make any improvement in loan recovery challenging,” Fitch said.
Sri Lanka’s regulatory NPLs (over 180 days) had reached 10.6 percent by end-December 2019,
The FLC sector’s regulatory NPL ratio (past due over 180 days) reached to 10.6 percent at end-December 2019, which is substantially higher than the banking sector’s regulatory NPL ratio (over 90 days past due) of 4.7 percent, Fitch said.