LFC sector revitalised in 2011

The once distressed Licensed Finance Company (LFC), formerly known as the Registered Finance Company (RFC) sector had been revitalised in 2011.

The industry's credit assess pasted robust growth driven by rising credit demand amid a more conducive economic climate. In contrast to the previous financial year, the industry liquidity levels moderated in FYE March 31, 2011 fuelled by aggressive loan expansion of around 40 percent.

Generally LFC's asset quality is weaker than banks, given the higher risk levels of their targeted clients. Increased awareness and efforts in improving asset quality bore fruit in fiscal 2011 as reflected by the slower accretion of non-performing loans, compared to previous years.

The industry's loan portfolio has yet to be sufficiently seasoned given the aggressive loan growth in 2011.

RAM Ratings Lanka remains concerned that incidences of delinquencies will increase as the portfolio seasons.

Notwithstanding the robust credit growth most LFC's had maintained adequate capitalisation levels underpinned by strong internal capital generation and capital infusions by way of IPOS to comply with the regulatory listing requirements by mid 2011. However, the industry's funding mix had titled towards borrowings as deposit growth had noT kept pace with credit expansion.

Many industry players had increased their reliance on long-term borrowings due to the low interest rates thereby reducing near term maturity mismatches.

This had also resulted in the worsening of the industry's loan to deposit ratio to 139.13 percent as at end December 2011.

Notably LFC's generally provide long-term loans that target the high risk strata of borrow which in turn permit them to charge high rates than Licensed Commercial Banks (LCB's).

The industry's margins widened in Fiscal 2011, largely supported by lower funding costs amid the faster downward pricing of deposits and also underpinned by the surge in loan assets concentrating on high - yielding products.

This had helped the industry to return after the previous year's losses.

The LFC industry asset quality is expected to be pressured resting the strength of underwriting and collection procedures against the backdrop of rising interest rates and inflationary pressures.