Non-bank lenders make a surprise about turn in asset quality

• Sector still reeling from shock dealt by economy’s collapse firing rates to exponential levels 
• Even eased NPL ratio was second highest among data going back to December 2013 

In what appears to be a surprise development, the non-bank finance companies made an about turn in their asset quality while slightly improving their earnings, on the back of higher interest margins in the quarter ended on September 30.

The data compiled by the Central Bank showed the non-bank finance institutions sector gross non-performing loans ratio, the key measure of the sector asset quality, slightly improving to 16.81 percent in the September quarter, from 17.03 percent in the June quarter.

However, this was substantially higher from 11.00 percent stood at the end of 2021 and 10.59 percent prior to the pandemic in December 2019. 

The latest asset quality data clearly suggests that the sector is not at all out of woods, as the September asset quality ratio was the second highest after June levels, when parsed with the data that dates back to 10 years ago.  Earlier, the data showed that the banking sector asset quality had fallen to its multiyear low levels in September, with the industry gross non-performing loans ratio rising to 10.9 percent in the same quarter. 

The industry is bracing for the ratio to rise further this year, making the situation even more challenging, as the payment relief gets unwound while the borrowers are in for further hardships with the rising taxes, uncertain inflation outlook and slow progress and long-drawn-out recovery of the economy. The prospects of restructuring the domestic debt could also spell disaster for the sector, should that get underway as part of a broader package of terms by creditors to agree to restructure Sri Lanka’s external debt. 

Meanwhile, the non-bank finance sector profitability matrix and investor attractiveness ratio, the return on equity, showed a slight improvement from 7.85 percent in June to 9.42 percent in September, albeit it was a decline from 16.66 percent in December 2021. 

However, prior to the pandemic in December 2019, the return on equity in the sector stood at 5.56 percent, as even then the sector was mired in a web of challenges from rising non-performing loans to declining growth and rising regulatory capital requirements.
The sector logged higher returns to its stockholders in the September 2022 quarter, on the back of expansion in the margins, which appear to have been helped by the steeper increase in interest rates in 2022. 
The net interest margin of the sector rose slightly to 8.23 percent, from 7.45 percent in June, helping the sector to preserve its profits, which otherwise would have come under severe pressure from credit costs amid the rising interest rates in the economy.