Major challenges for SL’s finance and leasing firms-Fitch

Restrictions on vehicle importation will continue to constrain growth prospects of Sri Lankan finance and leasing companies (FLCs), dampening prospects for the sector's earnings, Fitch Ratings said in a new report.

Higher second-hand vehicle prices due to limited new vehicle supplies have reduced affordability and will most likely weaken future demand for vehicle financing. Sri Lanka has banned vehicle imports since March 2020 to manage its already weak foreign-currency reserves, it said.

Fitch believes the ban is likely to remain in effect at least until the end of 2022. This has caused surging demand for second-hand vehicles, inflating prices by around 50 percent depending on vehicle type. The higher prices have supported loan recoveries from repossession in the near term, but may expose FLCs to unexpected sharp price corrections.

Weaker growth prospects coupled with the economic and financial fallout from the pandemic have reduced Sri Lankan FLCs' credit profiles, the report said.

“The industry's total loans fell by 2.2 percent in the year to June 2021 (1QFY22), marking the fifth consecutive quarter of loan contraction for the industry. The sector non-performing loans ratio, based on loans over six months past due, had climbed to 13 percent by end-1QFY22, against 7.7 percent at FYE19. Similarly, FLCs’ profitability remained under pressure with annualised return on assets narrowing to 1.8 percent in 1QFY22 from 2.8 percent in FY19 due to higher credit costs and declining top-line revenue,” it said.