Fitch rates Regional Development Bank ‘BBB+’; Outlook Stable

Fitch Ratings Lanka said yesterday it has assigned Regional Development Bank (RDB) a National Long Term rating of ‘BBB+(lka)’. The Outlook is Stable.

RDB’s rating derives support from its 100% state ownership. The rating is however constrained by the bank’s relatively small asset base by local standards and, therefore, relatively less systematic importance compared to other large state owned banks.

The rating could be upgraded if the systemic importance of RDB to the government increases as evidenced by its increasing market share of rural lending through an enlarged franchise. Conversely, the rating would be downgraded if state support to the bank is constrained or reduced or if significant deviations occur in RDB’s lending practices away from its core microfinance loan book.

At end 2006, the government of Sri Lanka announced that it would merge the six regional development banks to form one combined entity. The merger occurred in May 2010, following which RDB re-branded and launched its merged entity’s combined operations from its new head office in Colombo. RDB is 100% state-owned (directly and indirectly), with the Ministry of Finance having a stake of 79.81%, and the three state banks (Bank of Ceylon (‘AA(lka)’/Positive), People’s Bank (‘AA-(lka)’/Positive), and National Savings Bank (‘AAA(lka)’/Stable)) holding approximately 6.7% each.

The merged RDB is primarily a micro-finance lender or micro-lender to Sri Lanka’s rural community, and uses its extensive network of 250 branches (in the local context) and its field officer structure to manage loans and mobilize deposits. Due to the beneficial business climate of the post-war economy, RDB’s loans grew by 31.4% in 2010 (FY09: 4.9%). Microfinance loans accounted for 39% of total loans at FYE10 (financial year ended December 2010), while pawn-broking loans (gold-backed loans) and housing loans accounted for 37% and 24%, respectively. Approximately 70% of loans were below Rs. 100,000 (approximately USD900). Fitch notes that the bank has reasonable sound asset quality indicated by its low non-performing loan/gross loans figures (3% at end December 2010 and 3% at end March 2011). RDB’s asset base and total equity was Rs. 48.5bn and Rs. 3.8bn, respectively, at end March 2011.