NBFI sector poised for robust growth says LRA

Tuesday, 25 February 2025 04:16 - - {{hitsCtrl.values.hits}}

The Non-Bank Financial Institutions (NBFI) sector in Sri Lanka is poised for robust growth, supported by improved macroeconomic stability, rising credit demand, and ongoing Central Bank-led consolidation efforts aimed at enhancing sector resilience.

By 2QFY25, the sector exhibited notable asset growth, stronger profitability, and better asset quality, underpinned by a well-capitalised position according to insights from Lanka Rating Agency's (LRA) study, reflecting data as of 2QFY25.

Key findings

The sector’s total capital base stood at ~Rs. 358 billion, reflecting a strong Capital Adequacy Ratio (CAR) of ~23.8%.
The sector assets grew to Rs. ~1,838 billion in 2QFY25, reflecting an ~8.4% CAGR from FY15 to FY24.
Profitability improved significantly, with PAT reaching ~Rs. 26.3 billion, while ROA and ROE strengthened to ~5.7% and ~12.3%, respectively.
Asset quality showed recovery; the gross NPL ratio declined to ~12.8% in 2QFY25, from ~22.0% in 2QFY24.
The sector’s total liabilities increased by ~11.5% as of 2QFY25, driven primarily by higher deposits, while borrowings grew by ~15.2% during the same period.
The CBSL’s NBFI Master Plan requires a minimum stability score of 60 by 2027 for standalone operations, encouraging sector resilience through potential mergers.

Sector vulnerabilities

The industry is skewed towards 12 largest entities holding Rs. ~1,478 billion (~80%) of the sector’s total assets, and the six largest entities contribute ~82% of sector profits.
Most of the sector’s deposits and borrowings were short-term, maturing in less than 12 months, exposing the sector to liquidity and rollover risks. As of 2QFY25, deposits and borrowings accounted for ~54.9% and ~15.1% of total assets, respectively, highlighting the sector’s vulnerability to funding pressures in times of market stress or rising interest rates.
Despite improvement, the LFC sector retains a higher share of household sector NPLs (~56.8%), reflecting persistent credit risk.

LRA’s overall assessment suggests the sector is on a positive growth trajectory, although vigilant credit risk management and adaptation to the ongoing consolidation process will be essential for sustained stability. Full report is available at www.lra.com.lk

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