Finance and leasing companies are considering investing in new ventures, away from traditional lending and leasing to overcome severe pressure from rising interest rates, inflation, and the sudden tax hike on motor vehicles, senior finance company officials said.
They noted that the government’s latest move aimed at tiding over the current account deficit in the balance of payments will increase risks especially in smaller finance companies. Managing Director, Abans Finance and former chairman of the Finance houses Association of Sri Lanka, Kithsiri Wanigasekera told the Business Times that the increase in interest rates on Treasury Bills has resulted in a sharp increase in interest rates on deposits accepted by Commercial Banks and Licensed Finance Companies (LFCs).
In accordance with Central Bank (CB) directives, interest rates on deposits payable upto a period of one year and for a period of more than one year has increased sharply compelling LFCs to increase their lending rates in order to maintain interest margins to operate as viable financial institutions. Deposit rates in banks and LFCs have risen to the level of 16% to 18%, he said, adding that the lending rates also have seen a proportionate increase that will affect borrowers who will now have to pay comparatively high monthly installments on the facilities they obtain.
He said these changes will adversely affect the asset quality of banks and LFCs in the times ahead since the level of non-performing loans is likely to increase in an era where interest rates are high with deteriorating recoveries.
Referring to the recent increase in duty on all types of motor vehicles, he said that it will reduce the buying power of the average vehicle buyer owing to the fact that the new prices on these vehicles will not be within the reach of majority of these buyers. The situation will be worse in the case of buyers of 3-wheelers since the new prices of these vehicles and the quantum of lending facilities on leases, hire purchase facilities and loans will be high to obtain a facility.
3-wheeler owners service their borrowing facilities out of the regular earnings on their hires. What is debatable is as to whether the revenue they could generate on a monthly basis in the future will be adequate to meet the monthly commitment on their facilities after allowing for operating expenses.
The position with regard to new motor cycle owners will also get affected badly since the servicing of monthly installment on new facilities will be high exerting pressure on payments of the majority of customers who are fixed income earners, he said.
Asia Finance Ltd CEO - Sanathana Dalugoda said finance companies could face pressure if they mobilize funds at very high rates because they will have to lend at a higher rate. At present, finance companies are not affected but if this current situation prevails for six to nine months, small finance companies will have to face serious cash problems, he added.
Almost 70 % of the loans were given for vehicle finance by many finance and leasing companies as they are easy to repossess and sell. Such companies will have to curtail this practice and look into new financial instruments, Mr. Dalugoda said.
The sale of private cars, commercial vehicles, 2-wheelers, tractors, agricultural equipment, consumer durables (television sets, washing machines and kitchen appliances) and housing is significantly dependent on borrowed funds. Higher interest rates also raise the cost of construction of the government’s infrastructure investment programme.
Therefore, rising interest rates discourage construction activity as well as the sale of motor vehicles, two-wheeler, tractors, farm equipment, cement, construction, and steel and consumer durables, he said.
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