Leasing companies’ future profits under pressure due to bank borrowings, stringent regulations

Sri Lanka’s leasing companies are likely to experience a decline in profits in the future due to their greater reliance on bank borrowings and heavier regulations, a top official of a leading finance company in the country opined.  
“The future holds many challenges. More regulation to the industry is inevitable and higher costs will depress profit margins in a more competitive industry landscape,” Singer Finance PLC Chairman and leading economist Dr. Saman Kelegama said in the firm’s annual report released this week.
Dr. Kelegama, who is also the Executive Director of the Institute of Policy Studies, noted that the funding structure of leasing companies has changed to reflect 36.2 percent of the total in 2016 made up from borrowings compared to 31.6 percent in 2015, while the share of deposit for the same period fell to 43.7 percent from 48.3 percent. “The sector’s reliance on retail deposits has gradually shifted towards bank borrowings over the past two years considering the flexibility and cost factor,” he said.
Interest rates were kept artificially low by a politically influenced Central Bank in 2015 until the monetary policy was gradually tightened from 2016.

Dr. Kelegama noted that the current high-interest environment will result in higher finance costs for leasing companies.
Even in Singer Finance, although the bank funding amounted to just 24 percent of its funding structure, interest on bank loans amounted to 42.1 percent of the firm’s total interest expenditure.
Singer Finance’s total interest expenses increased 42 percent year-on-year (YoY) in FY16/17 while interest income increased 22 percent YoY. Two of the country’s largest finance companies, People’s Leasing & Finance PLC and LB Finance PLC too saw their interest expenses increasing by over 40 percent compared to interest income increasing in the range of 20-25 percent.
 First Capital Research recently noted that this phenomenon is likely to arise due to a majority of finance company loans are extended at fixed rates. Given the intense regulations on vehicle leases, which had been the core business of most leasing companies in the past, both People’s Leasing & Finance and LB Finance are looking to expand in the mortgage loan space, and to introduce variable interest rate products. (CW)