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Coronavirus intensifies pressure on Sri Lanka finance companies

The coronavirus outbreak and the resultant prolonged business disruptions will put additional pressure on Sri Lankan finance and leasing companies' (FLCs) earnings and asset quality, says Fitch Ratings.
The ultimate economic and financial market implications of the outbreak are unclear, while Fitch considers the risks to NBFIs' credit profiles to be clearly skewed to the downside.

Fitch expects Sri Lanka FLCs to face multiple challenges in the near team, including muted loan growth, margin compression amid lower interest rates, and rising loan-impairment charges due to asset-quality pressures.

"We believe that there could be a fall in loan growth in 4QFY20 (ending 31 March 2020), with growth already sluggish up to end-3Q20 (yoy decline of 0.9% in gross loans). The degree of recovery in FY21 will depend largely on the duration and severity of the virus outbreak," the rating agency said.

The Central Bank of Sri Lanka (CBSL) has announced further relief for COVID-19-affected businesses, and individuals are to be offered similar relief by FLCs as those offered to customers of banks, including debt moratorium. We believe that these have mixed implications for FLCs.

A one- to six-month debt moratorium, depending on the type of credit line, will have negative first-order implications for FLCs, but a reduction of the liquid-asset requirement for deposits and borrowings could reduce near-term liquidity shocks stemming mainly from non-payment of loan rentals.