Colombo (News 1st) – Fitch ratings said, Sri Lanka’s finance and leasing sector will face added pressure for consolidation as deadlines for the implementation of tougher capitalisation requirements approach in 2021. It added, though the consolidation of the sector is positive for financial sector stability in Sri Lanka, the process could be impeded by a challenging operating environment.

Gross loan growth for Sri Lanka’s finance and leasing companies (FLCs) has slowed sharply in a sluggish economy, coming in at only 0.5% yoy at end-September 2019 against 12.9% on average between end-2015 and end-2018.

The capacity of some of smaller FLCs to withstand asset-quality pressures stemming from this more challenging environment has been weak, owing in part to thin capital buffers.

Figures from the Central Bank of Sri Lanka (CBSL) indicate that FLCs accounted for 7.6% of total financial system assets at end-2018, so developments in the sector are significant for the overall stability of the financial sector. The top 10 FLCs accounted for 69% of the sector assets at end-September 2019, with 33 smaller FLCs representing the remaining 31%.
FLCs may face difficulty improving their profitability, as we expect economic growth to remain subdued. This could impede efforts to meet enhanced regulatory capital requirements by generating capital internally or by raising capital externally. We believe this risk will be higher for smaller standalone finance companies.

The tough operating environment may also impede consolidation, as asset-quality issues and limited near-term growth prospects for the sector could make M&A less attractive.

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