Economic Recovery Drives Sri Lankan Finance and Leasing Companies Growth

Fitch Ratings: Sri Lanka’s economic recovery, moderating inflation, and lower interest rates are poised to spur finance and leasing companies’ (FLCs) performance in the financial year ending March 2025 (FY25), says Fitch Ratings in a report. The loan growth will also be supported by further relaxation of vehicle import restrictions imposed since 2020 to preserve the country’s foreign reserves.

Economic growth turned positive from 4Q23 following six quarters of contraction, and monetary conditions have eased significantly. The normalisation in inflation and interest rates amid a revival of economic activities has boosted FLCs' credit demand, particularly in the key vehicle-financing segment. FLC sector loan growth expanded by an estimated 9.6% yoy in 1QFY25 (FY24 estimate: 2.2%).

We expect asset quality to improve further on recovering borrower repayment capacity and FLCs’ focus on loan recoveries. The industry's 90 days past due non-performing loan ratio eased to 13.6% by 1QFY25 from 17.8% at end-December 2023. Profitability will be supported by lower funding and credit costs, with return on assets rising to 5.5% in FY24 from 3.0% in FY23.

Sri Lanka's ongoing economic recovery remains fragile and sensitive to the progress of its economic reform programme, with any significant slippages potentially raising risks to the sector’s growth, asset quality and earnings, and standalone credit profiles. The ratings implications will depend on whether the ratings are driven by entities’ standalone credit profiles or external support, taking into account relativities with other rated entities in Sri Lanka.