Senkadagala stops writing off loans, starts provisioning

Senkadagala Finance Company (SF), based in Kandy, has in the current financial year stopped its policy of writing off loans in arrears for over six months (except for those secured by deposits) and began provisioning against such loans in line with the guidelines issued by the Central Bank of Sri Lanka (CBSL).

Fitch Rating, issuing a statement on a rating announcement, said consequently, gross NPLs (defined by Fitch as advances in arrears for over 3 months) and or gross loans increased to 10.8% at Q108 and 8.0% at FYE07 from 4.0% at FYE06. This aside, the prevalent difficult economic climate also caused asset quality to weaken. However, at the regulatory six-month level, the company's NPL ratio is more favourable at 2.8% at Q108 and 2.9% at FYE07, as the majority of NPLs fall into the three to six months in arrears category, Fitch said.

The rating agency said it affirmed Senkadagala's national Long-term rating at 'BBB+(lka)' and at the same time affirmed SF's 'BBB+(lka)' national rating assigned to the 2005/2009 Unsubordinated Redeemable Debentures. The Outlook on the ratings is Stable."The rating reflects SF's strong profitability and comfortable capitalisation as well as its medium sized asset base and limited revenue and funding diversity," Fitch said.

Hire purchases (HP) grew substantially in FY07 due to the higher demand for HP owing to the tax advantage enjoyed by HP borrowers as rentals do not attract VAT, as well as greater activity in the second-hand vehicle market where HP is the preferred option. Consequently, HP dominates the portfolio, accounting for 51% of the total at FYE07 although leases are still significant, accounting for 42% of the total at FYE07, Fitch said.

Healthy margins from SF's exposure to the sub prime customer segment enabled ROA to remain strong at 6.4% in FY07. This was despite a decrease from 6.8% in FY06 due to higher provision charges and higher operating costs resulting from the expansion in its branch network. SF's main source of funding are medium-term asset-backed borrowings secured against lease and HP receivables. Such borrowings accounted for 54% of funding at FYE07; 80% of loans have been pledged against these borrowings. Deposits accounted for only 16% of funding at FYE07, although the company intends to focus on mobilising deposits to diversify its funding base.

SF was established in 1968 and is engaged in the provision of vehicle finance. The company is 98.34%-held, directly and indirectly, by the founding Balasuriya family. It has 20 branches and accounted for 4.% of the assets of registered finance companies in Sri Lanka.