Financial Times

Asset quality of finance companies deteriorating - RAM Ratings

The asset quality in the registered finance company (RFC) industry has been deteriorating over the past two years, having been affected by the economic downturn. According to a report by RAM Ratings (Lanka) Ltd, loan growth is expected to decelerate while asset quality is likely to be tied to macroeconomic fundamentals and overall business sentiments.

RAM noted that although asset quality varies significantly among the different industry players, many RFCs have improved their credit-origination standards and monitoring procedures aside from strengthening their recovery efforts in a bid to maintain asset quality.

RAM stated in the report that the much-publicized collapse of two finance companies in 2008 had focused the spotlight on deposit-taking financial institutions. As a result of sudden and substantial withdrawals, many of these entities faced liquidity pressures while the segment which was hit hardest was the RFC sector.

However, well-rated or prudently managed RFCs had been able to withstand the pressures better than others. Moreover, the timely intervention of the Central Bank (CB) and a spate of ownership and/or stewardship changes have helped stabilize the industry.

According to the report, one of the key indicators of the health of a financial institution’s loan portfolio is its gross non-performing-loan (NPL) ratio. The NPL ratio of an RFC measures the proportion of loans that have been in arrears for a period of six months or more. RAM noted that the industry’s gross NPL ratio has been deteriorating in the past two years, rising to 6.46% as at end-March 2009 from 4.56% as at end-March 2007. The quality of loans has weakened as many borrowers have been unable to service their debts as a result of elevated interest rates and inflationary pressures.

The report stated that in line with the poorer asset quality, most RFC’s have taken steps to curtail lending and have adopted a relatively conservative approach when expanding their loan books.
However, it is vital to note the significant level of variance among the different RFC’s with regard to risk management and hence, asset quality. Certain players have successfully maintained consistently healthy, better-than-industry asset quality due to their commendable credit-origination standards and unmitigated focus on monitoring.

The report stated that it is evident that most RFCs have strengthened their recovery procedures with regard to repossessing vehicles for which payments are in arrears. Accordingly, RAM noted that there has been a build-up of seized assets in the industry. Given the slump in demand for vehicles, many RFCs face difficulties when trying to dispose of these repossessed items. This is viewed with concern as several players have been forced to sell off such vehicles at a loss.

RAM says that another concern is the industry’s heightened exposure to real-estate assets. The RFC industry’s investments in real estate spiked up Rs.5.4 billion to Rs.14 billion in the year ended 31 March 2009, translating into 8.6% of the sector’s total assets. Increasing exposure to real estate is deemed risky because of the current slump in the property market and the inability to dispose of assets in the short term, thereby exposing RFCs to liquidity risk.

Top to the page  |  E-mail  |  views[1]
Other Financial Times Articles
> Colombo stock market trading soars
> Garment sector picking up
> Supreme Court considers F&G restructuring plan, special Trust
> Foreign fund gets 10% in Ceylinco Insurance
> CB withdraws 20% bonus interest on RFC/NRFC accounts
> HNB brokers name change
> COMMENT - Emerging out of poverty
An objective analysis of tea imports for re-export
> Expatriate workers rights in the US
> Asia Cap group goes to the North
> Visit of high-powered US biz delegation to Sri Lanka
> IFC-supported Business Cells to help small enterprises grow in Sri Lanka
> Focus on governance challenges at CIMA Summit 2009
> ACHIEVERS award for Mayfair Lanka (Pvt) Ltd
> UN-HABITAT Business Award for Dr Darin Gunesekera
> Sri Lankans down 1 million litres of
> Deutsche launches mobile authorisation in Sri Lanka
> EWIS frontier systematic e-waste management in Sri Lanka
> Emirates Airport Services moves to new office at BIA
> Oil exploration in the Mannar Basin
> Lanka's FDI must double - CB Governor
> Plenty Foods to train IDPs in corn growing
> Trade delegation from Mahratta, India visits FCCISL
> Rural Sri Lanka drives FMCG growth - Nielsen data shows
> Emirates’ Wolgan Valley Resort & Spa opens in Australia
> Plantation companies say management fees brought down
> Sri Lanka poised for BPO growth - Aegis, India
> BOI meets Vietnam delegation
> Troubled Okanda Finance seeks liquidation
> Ceylinco Life helps two schools in Trincomalee
> Asia Miles named “Best Frequent Flyer Programme”
> Asset quality of finance companies deteriorating - RAM Ratings
> Ambitious target of 2.5 mln tourists in 2016 achievable- industry official
> Local NGO prepares new measurement for housing
> Deepal on ‘new ideas’ at TMC Kalutara
> ComBank presents computers to Vocational Training Centre in Tellipallai
> Tourism employees stage protest
> No alcohol on New Year’s Eve
> FR case against SLT dismissed
> Unlawful privatisations in Lanka – Role of the Auditors
> Wonder drugs cost less and saves lives- DPJ Chairman
> Fitch says fiscal targets are ambitious
> Hedging case resumes in Supreme Court
> Ceylinco Insurance - Maldives announces 70 % interim dividend


Reproduction of articles permitted when used without any alterations to contents and a link to the source page.
© Copyright 2009 | Wijeya Newspapers Ltd.Colombo. Sri Lanka. All Rights Reserved.| Site best viewed in IE ver 6.0 @ 1024 x 768 resolution