RAM assigns long-term credit rating of BB to Bimputh Lanka Investment

RAM Ratings Lanka has assigned the respective long- and short-term financial institution ratings of BB and NP to Bimputh Lanka Investment Ltd. (BLI); the long-term rating carries a stable outlook.

The ratings are supported by the company’s good asset quality, healthy funding mix and strong capital cushioning.

Moreover, the ratings are upheld by the financial flexibility and operational synergies derived from its shareholders. Nonetheless, the ratings are constrained by BLI’s small size and short operating history.

Established only in 2007, BLI is a registered finance company and falls under the regulatory purview of the Central Bank of Sri Lanka (CBSL). The company is part of the Daya Group, a large diversified conglomerate. Meanwhile, Sevanagala Sugar Industries Limited (SSI), a wholly owned subsidiary of the Daya Group, is BLI’s largest shareholder with a 34.60% stake in the company.

The remainder of the shares is held by other subsidiaries of the Daya Group as well as the founder, Daya Gamage, and his family members. BLI operates as the financing arm of the Group by catering to the financial needs of the rural masses, mainly concentrating on the sugar cane outgrowers who supply feedstock to SSI and the paddy farmers predominantly located in the Eastern province.

In terms of size, the company is among the smallest in the industry as it accounted for only 0.24% of total industry assets as at end-March 2010. Presently, it has a network of seven branches. Moving ahead, it is expected that the company would continue to leverage on the captive market of sugar cane farmers. However, growth in market share would likely be achieved via the expansion of its branch network and the introduction of new products such as pawn-broking.

Meanwhile, the company’s asset quality is deemed to be good despite its reliance on the agricultural segment of the economy, which is vulnerable to price fluctuations and weather conditions. The company’s loan book consists mainly of cultivation loans which accounted for 69.60% of its total loans as at end-FYE March 2010; of this amount, 43.31% had been loans to sugar cane outgrowers that are guaranteed by SSI, which buys the sugar cane for processing at its sugar refinery. BLI has benefited from synergies derived from SSI, which acts as a branch of BLI in its disbursement and collection procedures.

Moreover, SSI helps to assess the outgrowers’ borrowing capacity, executes the loan agreements and collects payments on behalf of BLI from the amounts paid for the harvests. As such, its gross NPL ratio stood at a benign 2.11% as at end-December 2010 compared with the industry average of 10.01%. However, BLI’s loan portfolio is less seasoned compared with other RFCs; therefore, its NPL ratio may settle at a higher level in the future given its loan book expansion.

RAM Ratings Lanka noted that BLI’s profitability had benefited from low-cost funding from its shareholders and related parties, which had been reflected in relatively high net interest margins in previous financial years. However, the company’s margins contracted during the nine-month period ended December 2010 because of delays in crop harvesting; BLI had recognised interest income of sugar cane loans on a cash basis upon harvest. Nonetheless, RAM Ratings Lanka expects margins to revert to ordinary levels upon harvesting.

In addition to lower net interest income, the company’s bottom line had been affected by the escalation of overhead costs in light of its branch expansion. Its cost-to-income ratio worsened to 101.66% for the nine-month period ended December 2010; as such, BLI recorded a loss of Rs. 0.45 million for the same period. The company’s performance is likely to be pressured, and would possibly remain in the red over the medium term due to its plans to open another five branches by March 2011; these branches would take time to break even.

The company’s funding and liquidity levels are deemed healthy owing to its balanced funding structure. The company’s funding mix comprised customer deposits (51.62%) and shareholders’ funds (47.71%) as at end-December 2010. Meanwhile, more than 30% of its deposit base consisted of low-cost deposits placed by the founder and related individuals,’ reflecting the financial flexibility BLI derives from the Daya Group. Additionally, BLI’s statutory liquid asset ratio clocked in at a high 39.09% as at end-December 2010, providing ample room for loan-base expansion over the short term.

RAM Ratings Lanka deems the company’s capital cushioning to be strong as both its Tier-1 and overall risk weighted capital adequacy ratio stood at a high 55.06% as at end- December 2010, well above the respective regulatory minimums of 5% and 10%. However, this is likely to moderate as BLI expands its loan books.