RAM Ratings Lanka has revised the outlook on the long-term rating of Lankaputhra Development Bank Limited (LDB) from stable to negative, due to non-performing loans (NPLs) and frequent management changes.
The rating agency has reaffirmed LDB’s long- and short-term financial institution ratings, at A and P1, respectively. The ratings are largely upheld by the bank’s state ownership and reflect the bank’s sound liquidity position and sturdy capitalisation levels.
“Nonetheless, the outlook on the long-term rating has been revised from stable to negative, owing to the influx on non-performing loans. It also reflects frequent changes within the management hierarchy which hinder the bank from executing a clear strategy,” said the rating agency.
Following national elections LDB’s previous board was dissolved and a new board appointed. However, several key management positions remain vacant. The bank’s senior management team has also changed frequently since its inception, noted Ram Ratings.
The government’s objective of funding the small and medium enterprises (SME) is the bank’s key focus, but lending to this riskier segment has taken a toll on the bank’s credit quality.
LDB’s gross NPL ratio weakened from 19.18% by end December 2008, to 53.46% by end December 2009. The worsening trend had been fuelled by defaults on a few large loans. LDB’s largest NPL accounted for 9.54% of its loan base as at December 31, 2009, or 18.72% of its total NPLs as at the same date. The bank’s SME portfolio, inherited from the merger with Small and Medium-scale Enterprise Bank Limited, remained plagued with delinquencies.
The default rate for this portfolio was 92.26% as at end December 2009, accounting for 18.06% (or Rs 263.22 million) of the bank’s gross NPLs. Lack of parate rights, or the ability to repossess assets without a court order, has also hindered the Bank’s recovery efforts.
LDB was incorporated by the government in 2006, with the objective of strengthening the SME sector, in line with the National Economic Plan for 2006-2016. The bank focuses on providing funding to start-up SMEs, a segment overlooked by other financial institutions due to its inherently higher risk.