LB Finance hopes for economic upturn, will provide “good “credit this year
LB Finance PLC is gearing to manage three challenges this year while eyeing expansion in the region in the medium term.
Mr. Sumith Adhihetty
“This year will be tough,” Sumith Adhihetty, Managing Director LB Finance PLC stressed sitting down for an interview with the Business Times in Colombo. He explained that managing non-performing loans (NPL) is the first challenge for this year.
But the company at the beginning of last year had understood that with rising interest rates the quality of loans was set to deteriorate. Ravi Yatawara, Executive Director LB Finance PLC, joining in the discussion, said that at the onset of last year the company took measures to tighten their lending. “We were selective in our lending,” he said. This is probably why LB Finance PLC’s NPLs recorded some 3.2 per cent in their NPLs last year. This figure is commendable compared to the 5.5 to 6.5 per cent the non-banking sector recorded.
Mr. Adhihetty noted LB Finance had very good customers but they were slow in their repayments mainly due to cash flow issues stemming from the overall economic downturn.
The second challenge for LB Finance, Mr. Yatawara noted was that with the rising interest rates there is bound to be lending issues this year. The interest rates have risen by 1.7 per cent.
Mr. Yatawara added the third challenge as the impact on debt service levy. “This has eroded after tax profit by nearly 20 per cent on all finance companies. The effective taxes have gone up to 56 per cent from 48 per cent,” he noted. Now out of the pretax profit, finance companies are paying more than 50 per cent to the government as taxation.
Apart from the rising interest rates, rising NPL’s and high taxation recovering bad loans legally – especially mortgage loans – takes a very long time, Mr. Adhihetty added. “It takes more than a decade to recover the money,” he added. In this case he advocated parate execution powers for finance companies. Explaining this issue further, Mr. Yatawara said that finance companies such as LB Finance saw an opportunity to cater to the mid-level mortgages when the banks were catering to high-value mortgages for housing. “With this type of mortgage, recovering money is difficult. The banks have parate execution powers. We also have lobbied to the Central Bank and the Ministry of Finance to get these powers,” Mr. Adhihetty added.
For all finance companies that are into leasing, this will yet be another tough year, Mr. Adhihetty noted. “Sector-wise leasing is becoming more and more competitive.” Earlier finance companies were encouraged to diversify into trade finance business, property and auto finance (leasing).
Now with only leasing being lucrative, the other two sectors don’t realise much business, Mr. Adhihetty explained. Leasing is asset-backed lending. It is asset-backed as much as 98 per cent so the recovery can be 70 to 80 per cent. This is why leasing has been encroached by banks as well.
Last year has seen competition intensify in the leasing sector but returns have been attractive. In-line with this LB Finance is increasing its concentration into the leasing sector, Mr. Yatawara added.
Amidst the economic downturn, the company saw many businesses shrinking last year, both officials said. Among these, construction sector companies were badly affected, they said. “Construction companies who had undertaken government contracts were badly affected. This was owing to the downturn in the economy and them not being paid by the government,” Mr. Adhihetty explained. He reiterated that in this scenario, political stability is a must for the country at this juncture.
Apart from construction, distributors were heavily affected during the floods and coupled with the economic issues and high interest rates, they found it difficult to collect from retailers. Mr. Yatawara explained that the informal sector (money lenders, “seettu”) is still affected by the economic downturn.
Fortunately the hotel sector which was badly affected is now slowly recovering. The political setbacks during the past two months had impacted this sector badly. Mr. Yatawara noted that the agricultural sector is another which is slowly recovering. Mr. Adhihetty noted that weather patterns were the main cause for the agriculture sector being adversely impacted last year. “Our clients in Amparai, Polonnaruwa, Anuradhapura and Vavuniya got affected.”
In line with plans for this year, LB Finance is now in the process of revising its deposit rates. With its Myanmar operation breaking even and expanding into three more branches, the company is eyeing the rest of the region for expansion as well, Mr. Adhihetty added. This will be their mid term strategy. Apart from this Mr. Yatawara added that the company looks to expand into home loans for employed individuals.
“The tourism sector is improving. Hopefully the oil prices will reduce which will translate into cost-of-living improving. This will be better for all businesses,” Mr. Adhihetty noted.
Mr. Yatawara believes opportunities are still available if credit is given by finance companies. “So we are trying to provide good (recoverable) credit this year.”