To meet CBSL’s NBFI sector year end core capital requirements:
By Ishara Gamage
Even though the Government plans to consolidate Sri Lanka’s non-banking finance industry (NBFI) sector in mid 2022, the sector listed entities, have to raise nearly Rs11.1B by 31 December 2020 to comply with the extended core capital requirements set by the Central Bank of Sri Lanka (CBSL), the research arm of the First Capital group said.
In total NBFI industry has to raise nearly Rs 20.0B in 2021E to comply with the core capital requirement” it also stated.
“NBFI sector may record a substantial ‘LOSS’ in FY21E, weakest performance in the current “DECADE and with it, sector Return On Equity (ROE) is expected to decline to -15% for FY21E,” .
However, it stated that Big Cap Finance companies such as Central Finance, L B Finance PLC, People’s Leasing and LOFC were in the comfortable capital levels.
As Ceylon FT reported a few weeks ago CBSL is planning to protect the credibility of the sector while ensuring the nation’s financial system stability, by tightening sector capital adequacy based regulations from mid-2022.Under this proposed regulatory guidelines CBSL is considering giving strict mid -2022 ultimatums to all Sri Lankan licensed finance companies (LFC) and registered finance leasing establishments to fulfil its minimum capital adequacy requirements.
Meanwhile, according to the First Capital report, about six listed companies have the potential to raise funds this year through rights issues, while seven other listed companies need outside investor support.
Therefore, companies namely the LOLC Development Finance PLC (Rs 200 million), Orient Finance PLC (Rs 300 million), Asia Asset Finance PLC (Rs 400 million), Prime Finance PLC (Rs 1 billion), Merchant Bank of Sri Lanka (Rs 1.7 billion) and Softlogic Finance PLC (Rs 1.8 billion) were confident of fulfilling their capital requirements this year through rights issues.
Sinhaputhra Finance PLC
(Rs 900 million), People’s Merchant Finance PLC (Rs 1.3 billion), Associated Motor Finance Company PLC (Rs 1.4 billion) , Arpico Finance Company PLC (Rs 1.5 billion), Nation Lanka Finance PLC (Rs 1.7 billion) and Multi Finance PLC (Rs 2.3 billion) and Bimputh Finance PLC (Rs 2.6 billion) have to strengthen their capital requirements through new investments this year.
The NBFI’s market share is stagnated at the moment due to crippling economic conditions and with it, sector Return on equity (ROE) is expected to decline to –15% for FY21E.
NBFI sector started to feel the pressure of Non-performing loans (NPLs) since 2018, but after having the full impact of the COVID-19, NBFI sector NPL spiked to 14.14% from 11.4%. Bad debts are mounting on smaller players. While post moratorium, NPLs may reach an astronomical high of 20% at its peak, it predicted. The market share of NBFIs stagger at 9% for the last 3 years, but dipped over a 6-Yr Period they expect, NBFI market share to reduce to 6% by 2022E.
According to the report over 70% of the LFC asset base is skewed towards the 10 largest LFCs and Top 10 entities account for over Rs1.0Tn assets out of a Rs1.4Tn total sector asset base.
Leasing dominates the sector lending portfolio closely followed by Loans. Leasing grew at a CAGR of 17% for FY14-FY20 . Hire Purchase segment has almost been completely wiped out within a span of six years. Loan segment grew at a CAGR of 20% for FY14-FY20 .over 70% of the sector lending book including loans are Asset-Backed via vehicles.
NBFI Sector Profitability Plunged to a 5-Yr low as the targeted SME clientele struggle. SME contribution to GDP has been deteriorating in line with economic freefall, swinging to negative territory in 2019. GDP of SL comprises SME contribution of USD 43B out of a total GDP of USD 84B.
NBFI Sector borrowings plunged to 34% from 44% in FY17 amidst the surge in liquidity in the system and lack of credit growth.
Due to lackluster growth in the sector, NBFIs were seen settling the bank borrowings while heavily depending on deposits for fund mobilisation, funding profiles of Sri Lanka’s finance companies have been largely characterised by limited diversity, with deposits dominating the funding profile by 66% as of FY20. A highly concentrated and pricing-sensitive deposit-base is susceptible to market events and less reliable in situations of market distress.
According to the report higher deposit dependence coupled with limited access to funding lines could create liquidity stress for finance companies, as depositors will tend to shift to safer asset classes during crisis periods. Registered vehicle prices have shot up while unregistered vehicles are scarce due to import restrictions, resulting in lesser transactions and lower affordability’s a result, competition is intensifying in the Leasing segment in the NBFI sector due to attractive rates by Banks.
UB Finance ready to meet its capital guidelines
The unlisted UB Finance Co. Ltd. a subsidiary of Union Bank of Colombo PLC commits to a rights issue amounting to Rs 1.6 billion to strengthen its Balance Sheet and meet the capital guidelines of the Central Bank of Sri Lanka (CBSL) by 31 December 2020 as approved by the CBSL, the company statement announced on Friday.
The Company has recorded significant growth since its acquisition by Union Bank of Colombo PLC in 2011 and has established itself as a Premier Financial Services Provider in the island.
Despite the challenges faced by the Financial Services Sector due to the COVID-19 pandemic, the Management is optimistic about the future of Sri Lanka as a Commercial, Financial and Transshipment hub and is geared with innovative products and technological platforms to leverage on and support this economic growth, it stated.