With rising interest rates and bulk of the lending attached to leases, the finance sector is likely to experience a dip in margins according to First Capital Research.
Credit growth is expected to remain moderate around 16 to 18% despite deceleration from 2016. Despite rise interest rates and slower economic conditions FC Research expects NPL provisions of finance companies to continue to stay on the back significant price appreciations in the second hand vehicle market. Higher vehicle prices are likely to deter related borrowers from default while even if defaulted higher vehicles prices ensure finance companies of eliminating losses and recovering bad debts. FC Reserch expects the local finance sector to face moderately tough conditions to operate with thinning margins and new LTV regulations leading to slower and previous but moderate credit growth.
Finance sector comprises of licensed finance companies (LFCs) and specialised leasing companies (SLCs) represent 6% of assets of the Sri Lanka’s financial system and consists of 46 LFCs and 7 SLCs with a network of 1,259 branches. Despite slow economic conditions rise in (Non Performing Loans) NPLs are likely to be slow amidst price appreciation in vehicle prices as bulk of the lending is attached to vehicles. We believe the larger finance companies have an advantage with lower cost of funding and large conversion levels from leases to loans which improves re-pricing abilities at times of rising interest rates. Finance companies with better rating and larger asset base tend to have a lower cost of funding while some finance companies have already converted significant portions from loans to leases enabling them to re-price part of the assets in line with interest rates.
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