MITIGATING CREDIT RISKS
Thushan Amarasuriya highlights the trends and opportunities in leasing
Compiled by Azraa Killru
Q: According to Fitch Ratings, the ban on vehicle imports has affected revenues of finance and leasing companies. Do you foresee this as a significant threat to the sector? And if so, how can companies mitigate the associated risks?
A: As of 30 June, the contribution from leasing and loans to the income earning portfolios of the sector – which stood at Rs 1.17 trillion – was nearly 91 percent, according to the statistical data of the Central Bank of Sri Lanka.
As a consequence of the import restrictions and weak economic sentiment due to the pandemic, this segment contracted by 5.88 percent on a year on year basis to close at Rs 1.062 trillion at the end of June.
To mitigate the risk of shrinking portfolios, most companies financed second hand vehicles and turned their focus to gold loans. As a result, the yields of the respective portfolios began to improve.
Moreover, the fact that our citizens prioritise vehicle purchases no matter what the severity of the financial challenges faced is helped the sector mitigate this risk to a large extent. Meanwhile, the low interest regime also repriced debt portfolios, which further reduced the risks associated with the top lines of income statements.
I would be more concerned about the vehicle price bubble that is being created at present due to the import ban. The credit authorities should be mindful of managing the associated risks when valuing collateral for leases and loans.
Q: How do prevailing macroeconomic policies affect the financial services industry?
A: The fiscal policy to reduce taxation was a good initiative and assisted the industry.
However, the fallout since the Easter Sunday attacks and the pandemic resulted in a deceleration of credit quality. This probably resulted in the expected economic expansionary activities not taking place due to hybrid reasons – i.e. the lender being overly cautious and credit demand deriving from more consumption rather than for investment purposes.
Monetary easing by the government at the height of the pandemic was a good measure as it ensured that liquidity risk was at a minimum – and there was plenty of liquidity available in the financial system for lending.
Q: What are the risks and challenges the sector faces in the post-COVID-19 era?
A: The main risks are a deceleration of portfolios and disruption to operations due to the ongoing health challenges.
In addition, sustained moratoriums and the inability to initiate recovery action led to customers postponing their repayments without exploring ways of exiting liabilities that are under stress. There is a corridor of opportunity for them to do so as a result of the appreciation in collateral values.
Q: Could you outline the trends of the digital ecosystem dominating financial services at present?
A: The trend is to reach a level where customers can transact remotely. This will also facilitate the formation of a new business model where physical presence is minimised.
Facilitating online banking, an e-wallet and common electronic fund transfer (CEFT) – which is integrated into the online banking system – have become basic necessities to enable a digital ecosystem.
Within these modules, there is a capability to open fixed deposits with minimal form filling and onboarding customers on the lending side.
Q: Is financial inclusivity a reality in Sri Lanka?
A: Having worked in the non-banking financial sector for more than a decade, I can vouch for the fact that it is the finance companies that enable financial inclusivity for first-time customers who haven’t yet been recognised or enabled by the formal financial sector.
Therefore, the role we play is significant for the economy and deserves due recognition.
There is more work to be done for financial inclusivity to become a reality in Sri Lanka. Paying attention to this vital question will definitely be one variable among many others for us to be recognised as a nation that is moving away from developing to developed country status.
Q: What are the upcoming opportunities the sector must prepare for?
A: Tech based financing both for personal loans and other lending products will soon become a reality – and be widely used – signalling immense opportunities in this space.
Meanwhile, microfinance has the potential for revival. This segment has unfortunately been disrupted due to nefarious business models of informal money lenders whose activities have time and again been wrongly associated with our sector.
However, this should be an area of focus for a developing country like ours.