Business Times

Fitch takes rating action against six Lankan Regional Development Banks

Regional development banks (RDB) loans grew just 5% in 2009 compared to 13% the previous year according to Fitch Ratings Lanka which affirmed the ratings of six RDBs this week. Kandurata Development Bank (KDB) was upgraded to 'BBB+(lka)' from 'BBB(lka)' and Outlook revised to Stable while Sabaragamuwa Development Bank (SDB) was upgraded to 'BBB(lka)' from 'BBB-(lka)' with a Positive Outlook. In a press release, Fitch explained that KDB’s and SD B’s ratings were upgraded due to sustained improvements in their financial profiles.

Both KDB and SDB over the last five years (2005-2009) have progressively reduced their non performing loan (NPL)/gross loan figures while having good profitability. Meanwhile, Rajarata Development Bank (RaDB) was affirmed at 'BBB+(lka)' with a Stable Outlook while Ruhuna Development Bank (RuDB) was affirmed at 'BBB+(lka)' with a Stable Outlook. Fitch stated that Wayamba Development Bank (WDB) was affirmed at 'BBB+(lka)' with a Stable Outlook and Uva Development Bank (UDB) was affirmed at 'BBB(lka)' with a Positive Outlook.

In affirming the ratings of RaDB, RuDB and WDB, Fitch stated that it recognizes that these RDB’s have had consistent profitability ranging between 0.9% to 1.6% in FY09, strong NPL/gross loan ratios ranging between 3% to 4% at FYE09 and low Net NPL/Equity ratios ranging between 4% to 10%. UDB's rating was affirmed one notch lower than RaDB, RuDB and WDB due to constraints faced by the bank, such as lower levels of automation, higher cost structures, and NPL/Loan ratios above the RDB sector average. Many of these constraints stem from frequent changes of UDB's General Managers over the last three years (three GMs in three years) which have impeded strategic direction.

At end-2006, Fitch stated that the government of Sri Lanka announced that it would merge the six RDB’s to form a combined entity. The vesting order being gazetted in Parliament will detail the eventual transfer of the assets and liabilities of the RDB’s to the merged entity, and the merger process is expected to be completed in the next three months. The Outlooks on the ratings indicate the possible direction of the ratings upon the conclusion of the merger.

Fitch noted that microfinance loans accounted for 46% of loans at FYE09, while pawn-broking loans (gold-backed loans) and housing loans accounted for 30% and 24%, respectively. Fitch stated that within the year, cultivation loans (5% of loan book) and pawn-broking loans (30% of the loan book) tend to move through two disbursement-recovery cycles within the year.

Also, RDB’s entire loan book tends to peak pre-harvest, and shrink post-harvest in line with the two main cultivation cycles. Approximately 70% of loans were less than Rs.100,000 or US$874. In addition, in the rural areas in which the RDB’s operate, pawning is mostly a form of short-term credit for agricultural purposes. Much of the housing loans are extended for three to four years to government servants, and are primarily for extensions and renovations.

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