19 October 2020 12:56 am
The recovery in private credit and the broader economic revival post-coronavirus are expected to lift many economic participants and sectors other than finance companies, as they could be left behind due to intense competition from banks, while leasing—which accounts for more than two thirds of their loans—has significantly slowed amid import controls on vehicles.
This together with the expected climb in the sector non-performing loans (NPLs) and narrowing margins in light of falling interest rates, could substantially erode finance companies’ market share and plunge the sector earnings into the negative territory in 2021, according to the latest research report by First Capital Research (FCR) titled ‘All gloom and doom for NBFIs.’
“Registered vehicle prices have shot up while unregistered vehicles are scarce due to import restrictions, resulting in lesser transactions and lower affordability. As a result, competition is intensifying in the leasing segment in non-bank finance institution sector due to attractive rates by banks.
Thereby, NBFI credit growth portion may remain subdued despite the expected recovery in private sector credit growth, resulting in total private credit being captured by the licensed commercial banks,” said Hiruni Perera and Nisansala Kuruppumudali, the authors of the report on the likely fate of the NBFIs post-pandemic.
FCR projected the NBFI sector NPLs to rise to 20 percent at its peak in 2021, with the gradual phasing out of the moratoriums extended to pandemic affected clients.
According to official data, the sector NPL by end-June was 14.14 percent, the highest in the recent history.
The NBFI sector market share by assets has shrunk to 9 percent from 11 percent from 2015 through 2019 while the profitability nosedived to 5-year low due to the continuous hardships faced by their targeted small and medium sized enterprise sector, what First Capital Research called as, “the crippling
tortoise economy”.
“The sector has also been affected by the slower-than-expected economic growth in Sri Lanka. In line with the declining GDP growth, private credit reached 4 percent in 2019 while NBFI credit turned negative at -3 percent,” the report noted.
If the growth dampening conditions protracted, FCR projected the NBFI sector’s lending market share to erode by a third to 14 percent by 2022, with the overall market share by total assets to “ potentially reduce
to 6 percent”.
To provide relief to the sector beset by the pandemic and also in view of the relief afforded to their clients by way of temporary holing off on loan settlements, the Central Bank recently extended the temporary reprieve on mandatory liquid asset requirement by finance companies by a further six months till March 31, 2021.
Further, the Monetary Board at the onset of the pandemic, gave an additional year for the sector to comply with minimum core capital requirements, providing the sector with some breathing space till it rides out the worst effects of the pandemic.