Non-bank finance sector asset quality woes persist though slowing

• For September 2023 quarter NBFI sector reported NPL ratio of 19.99%, down from all-time high of 20.36% in June quarter

The asset quality woes of Sri Lanka’s non-bank finance financial institutions (NBFI) appeared to have bottomed out in the quarter ended in September 2023, but the stock of loans in default still stands just shy of 20 percent levels reflecting that the sector is still grappling from last year’s crisis.

The latest data available through the quarter ended in September showed that the sector which consists of both licensed finance companies and specialised leasing firms recorded a gross non-performing loans ratio of 19.99 percent coming off from an all-time high of 20.36 percent in the June quarter.

The two sectors taken separately showed considerable divergence in their non-performing loans where licensed finance companies reporting a ratio of 19.95 percent whereas the specialised leasing companies reporting a ratio as high as 65.81 percent.   

The sector, which mostly deals with subprime borrowers is highly vulnerable to disruptions to the economy. Last year’s economic shocks had a devastating impact on the NBFI sector, which was just beginning to look past two years of stress during the pandemic. 

For instance, the sector’s non-performing loans measured as a share of total advances reached a pandemic era high of 13.86 percent by the end of 2020 when scores of borrowers failed to stay on their repayment schedules due to disruptions to their incomes. 

This marked an increase in the non-performing loans from 10.59 percent in December 2019, just prior to the disruptions began from the pandemic. 
Although the situation was seen gradually improving with the ratio coming down to single digit levels of 9.11 percent in the March quarter, last year, it shot up to 17.03 in the following quarter as the economic crisis started unraveling, firing runaway inflation.

The interest rates which were raised to exponential levels to control inflation put many borrowers into default and the growth virtually stalled in the sector, sending its non-performing loans ratio to astronomical levels.
As the economy appears to have turned a corner with both inflation and interest rates easing now, the September data provides a forerunner for potentially better asset quality readings from the sector going forward. 
The banking sector asset quality which is measured by stage 3 loans to total loans and advances held steady at 13.4 percent between the June and September quarters.

Banks have already begun to see some moderation in their non-performing loans in the current quarter while they have also started reopening their lending taps again which could hold the NPL ratio to come down further in the coming quarters. 
With the much expected lifting of the ban on personal vehicle imports at some point next year after four years of suspension could also help the NBFI sector to reinvigorate its growth as vehicle leasing carried a significant share in their loan portfolios.