FINANCIAL SERVICES
Compiled by Yamini Sequeira
SUSTAINABILITY IS AT STAKE
Chaminda Prabhath expects the economy to pick up and offer opportunities
Q: Could you describe the state of play and challenges faced by Sri Lanka’s non-bank financial institutions (NBFIs)?
A: The NBFI sector was established to cater to the segment that lies at the bottom of the pyramid – particularly to fulfil the leasing and hire-purchase needs of customers. Furthermore, the sector supports financial inclusion in Sri Lanka.
After banks entered the leasing segment however, opportunities have been restricted and NBFIs focussed more on the micro-leasing sector (i.e. two and three-wheeler leasing) and other products – such as gold, and business and mortgage loans – as well as microfinance.
Today, the NBFI sector is almost at a standstill as a result of the economic crisis, the unprecedented depreciation of the Sri Lankan Rupee, higher prices of essential goods and high interest rates.
This has resulted in restricted credit growth, a deterioration of asset quality and the decline of profitability. While adapting to the country situation, the sector remains focussed on recoveries and collections as credit origination was undertaken on a selective basis.
Q: So what are the most pressing challenges that need to be overcome?
A: NBFIs must expand their loan books. Due to the prevailing high interest rates however, this has not been happening. Although interest rates have been reduced slightly subsequent to changes in policy decisions, a further reduction is required to fuel the economy.
Many customers are investing their excess cash in fixed deposits due to the prevailing high interest rate regime, rather than ploughing those monies back into their enterprises. This in turn is exacerbating the weak business activity on the ground.
As an import dependent country, the prevailing restrictions on imports have led to losses for the trading community, which counts more than 30,000 employees and needs to be supported. Otherwise, trading will become unsustainable.
Gold loans have been a fallback for many NBFIs – but foreign exchange rate volatility has caused an uncertain gold loans market.
Q: How difficult have the last few years been for the NBFI sector?
A: The sector has been struggling with issues related to credit quality and low credit growth due to the economic downturn over the past few years.
In addition, it provided support through moratoriums and concessions to affected communities, and helped revive small and medium-scale businesses.
Now that the moratoriums have come to an end however, recovering monies due to NBFIs is very difficult since many customers are unable to repay the loans they’ve taken as their businesses have not picked up as expected.
In addition, the new taxes, high interest rates and shrinking disposable incomes have exacerbated their problems.
Meanwhile, the Central Bank of Sri Lanka’s master plan for the consolidation of the NBFI segment is aiming to accelerate the process and promote more mergers to bring the number of players down to about 20 from over 30 active institutions currently in the sector.
Q: What immediate steps are needed to resolve the challenges faced by NBFIs?
A: The ending of moratoriums has seen customers unwilling to hand over their vehicles even though they defaulted on their lease payments. According to the Finance Leasing Act, these vehicles can be repossessed.
However, many customers have remortgaged their vehicles to third parties.
The yards of NBFIs are filled to capacity with repossessed vehicles; and since vehicle prices have dropped, they are unable to recover what was once expected.
In the meantime, the issue of local debt restructuring, which has been widely discussed in recent weeks, is aimed at the banking sector and bond market – so NBFIs should be shielded to some extent from any impact.
Q: In view of the local economic environment, how do you view 2023 for the banking sector in particular and the financial services industry in general?
A: Sri Lanka faced an unprecedented crisis last year as debts rose to unsustainable levels due to large fiscal imbalances. Since our foreign exchange reserves were depleted, there was a sharp depreciation of the currency and debt servicing was suspended.
Despite all these challenges, a modest improvement was observed in the early part of this year with the gradual easing of liquidity pressure in the foreign exchange and money markets. Declining yields on government securities were supported by improved market confidence with the approval of the Extended Fund Facility (EFF) by the IMF.
Although there’s been some degree of stability this year, there are lingering issues such as the fuel quota and high interest rates. However, the government has taken positive steps to ensure fuel security by licensing new players in the market.
Large construction projects should recommence work without delay since the industry has a ripple effect on other sectors – including NBFIs, as the leasing of commercial vehicles will rise in the months ahead.
By the end of the year, we are expecting the economy to pick up and provide an opportunity for the NBFI sector to grow its loan book – and ensure business sustainability.
