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Sri Lanka finance companies face added regulatory pressure: Fitch Ratings

Sri Lanka's finance and leasing sector will face added pressure for consolidation as deadlines for the implementation of tougher capitalisation requirements approach in 2021, says Fitch Ratings.

"We view further consolidation of the sector as positive for financial sector stability in Sri Lanka, but the process could be impeded by a challenging operating environment," the rating agency said.

Gross loan growth for Sri Lanka's finance and leasing companies (FLCs) has slowed sharply in a sluggish economy, coming in at only 0.5% yoy at end-September 2019 against 12.9% on average between end-2015 and end-2018. The capacity of some of smaller FLCs to withstand asset-quality pressures stemming from this more challenging environment has been weak, owing in part to thin capital buffers.

Figures from the Central Bank of Sri Lanka (CBSL) indicate that FLCs accounted for 7.6% of total financial system assets at end-2018, so developments in the sector are significant for the overall stability of the financial sector. The top 10 FLCs accounted for 69% of the sector assets at end-September 2019, with 33 smaller FLCs representing the remaining 31%. The CBSL has sought to reduce risks by raising capital thresholds to encourage consolidation. FLCs are required to meet an enhanced LKR 2.5 billion (USD14 million) absolute capital requirement by 1 January 2021, up from LKR2 billion at present. The minimum Tier 1 capital ratio for FLCs will also rise from 6.5% to 7% on 1 July 2020, before increasing further to 8.5% from 1 July 2021.