October 22, Colombo (LNW): Sri Lanka’s finance and leasing companies (FLCs) are poised to benefit from the country’s improving economic landscape, with declining inflation and lower interest rates contributing to a more favourable outlook for the financial year ending in March 2025 (FY25), according to a recent Fitch Ratings report.
This recovery signals a positive turn for the sector, which is projected to see stronger performance after several challenging years.
One key factor behind the expected growth in the sector is the gradual relaxation of vehicle import restrictions, which have been in place since 2020 to preserve Sri Lanka’s foreign exchange reserves.
With these restrictions easing, demand for vehicle financing is set to increase, bolstering loan growth across the FLC sector. After six quarters of economic contraction, the nation saw growth return in the fourth quarter of 2023.
As inflation rates fall and interest rates return to more manageable levels, economic activity has begun to revive, further fuelling demand for credit.
The FLC sector is expected to witness a 9.6% year-on-year increase in loan growth during the first quarter of FY25, driven primarily by vehicle financing.
Fitch Ratings also highlighted improvements in asset quality within the sector, attributing this to recovering borrower repayment capacity and a more focused approach to loan recoveries.
By the end of the first quarter of FY25, the sector’s 90-day non-performing loan (NPL) ratio had improved to 13.6%, down from 17.8% at the close of December 2023.
This reflects the overall stabilisation of the economy, as more borrowers are able to meet their repayment obligations.
Profitability for FLCs is set to increase as a result of lower funding and credit costs, with Fitch projecting a rise in return on assets to 5.5% for FY24, compared to 3.0% in FY23.
This rebound is expected to strengthen the financial performance of companies within the sector, marking a sharp contrast to previous years of uncertainty and higher operational costs.
However, Fitch also urged caution, noting that Sri Lanka’s economic recovery remains delicate and heavily reliant on the continued success of its reform programme.
Any major setbacks in the implementation of these reforms could have adverse effects on the sector’s growth, asset quality, and overall earnings.
The credit ratings of individual entities within the sector will be influenced by both their standalone credit profiles and the level of external support, as well as their performance relative to other rated entities within Sri Lanka.
