Fitch Ratings announced that Sri Lanka’s ongoing economic recovery, combined with moderating inflation and lower interest rates, is set to drive the growth of finance and leasing companies (FLCs) in the financial year ending March 2025 (FY25). The positive outlook is also supported by the potential relaxation of vehicle import restrictions, which have been in place since 2020 to safeguard the country’s foreign reserves.
Sri Lanka’s economy showed signs of recovery in the fourth quarter of 2023, following six consecutive quarters of contraction. Eased monetary conditions, along with the normalization of inflation and interest rates, have contributed to a resurgence in credit demand, particularly in the vehicle-financing segment. As a result, FLCs’ loan growth expanded by an estimated 9.6% year-on-year in the first quarter of FY25, compared to 2.2% in FY24.
Fitch also noted that asset quality is improving, with the sector’s 90-day past-due non-performing loan ratio easing to 13.6% in 1QFY25, down from 17.8% at the end of December 2023. This improvement is attributed to borrowers’ increased repayment capacity and FLCs’ focus on loan recoveries.
Profitability for finance and leasing companies is expected to rise, driven by lower funding and credit costs. Return on assets is projected to increase to 5.5% in FY24, up from 3.0% in FY23.
However, Fitch cautioned that Sri Lanka’s economic recovery remains fragile and heavily reliant on the progress of its economic reform program. Any significant deviations could affect the sector’s growth, asset quality, and profitability, as well as the credit profiles of FLCs. The ratings will depend on whether they are influenced by the entities’ standalone credit profiles or external support, in comparison with other rated entities in Sri Lanka.