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Fitch:Sri Lanka Rules May Boost Capital, Mergers for Small NBFIs
April 5, 2017 / 6:48 AM / 6 months ago

Fitch:Sri Lanka Rules May Boost Capital, Mergers for Small NBFIs

(The following statement was released by the rating agency) COLOMBO, April 05 (Fitch) New regulations issued by Sri Lanka's central bank to increase minimum core capital levels for all licensed finance companies could spur small companies to improve their capital buffers and may reignite industry consolidation, says Fitch Ratings. Fitch believes the new directive is likely to address the need for higher capital buffers for the non-bank financial institutions (NBFI) sector as a whole to ensure financial system stability, given our expectation of a deterioration in asset quality and capitalisation in the sector following aggressive loan book growth in recent years and persistent weak operating conditions. The Central Bank of Sri Lanka issued a directive in February 2017 requiring all licensed finance companies to increase their minimum core capital levels to LKR2.5 billion by end-2020 in stages from the current LKR400 million, with the first target of LKR1 billion to be reached by 1 January 2018. Capitalisation for the NBFI sector remains relatively low, with the core capital ratio at around 11.7% at end-September 2016. This level of capitalisation is similar to that of the banking sector, but we feel insufficient, as NBFIs have higher risk appetite than banks. At end-September 2016, finance companies' reported six-month NPLs accounted for 5.4% of total advances, compared with the three-month ratio of 2.9% for the banking sector. Fitch estimates that the ratio could be much higher for the finance companies at a three months level. The new rules follow a previous plan to bring about financial sector consolidation, which did not significantly reduce the number of finance companies. There were 58 NBFIs covered by the "Master Plan for the Consolidation of the Financial Sector" in 2014-2015, some of which merged with larger finance companies or were acquired by banks. The sector currently comprises 46 licensed finance companies, of which the 20 largest ones accounted for about 80% of the sector's assets as of end September 2016. Based on publicly available information within the top 20, nine companies' core capital were below the LKR2.5 billion mark but above the intermediate target of LKR1 billion as of March 2016, while one company had negative core capital. Fitch estimates there are at least 18 small finance companies each with an asset base of less than LKR10bn at end-September 2016; among these, 12 had an equity base (approximated core capital calculated as equity less capital reserves based on publicly available information) of less than LKR1 billion. Further, eight of the finance companies in the sector are fully or partly owned subsidiaries of banks. As of September 2016, four of these fell short of the 1 January 2018 target. We do not expect the banks' credit profiles to be significantly affected by the capital injections they may have to make in their finance-company subsidiaries from time to time. Among the Fitch-rated entities, all 12 met the intermediate target of LKR1 billion due by 1 January 2018 as of end-2016, although six fell short of the final target. We believe most of the relatively larger finance companies are likely to reach the required capital levels through internal capital generation within the stipulated time frame, but nearly all the small finance companies are likely to require capital injections - or will have to be merged with larger entities with stronger capital. Contact: Jeewanthi Malagala, CFA Analyst + 94112541900 Fitch Ratings Lanka Ltd 15-04, East Tower, World Trade Centre Colombo 1, Sri Lanka Sugath Alwis, CFA Analyst + 94112541900 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT <a href="https://www.fitchratings.com">WWW.FITCHRATINGS.COM.. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. 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