Rising microfinance trends potential risk for Sri Lanka NBFIs

Sunday Times
03 Apr 2016

Rising exposure to microfinance at Sri Lankan nonbank financial institutions (NBFIs) could pose a risk to their credit profiles, says Fitch Ratings in a media release on Friday. The exposure among Fitch-rated NBFIs which stood at just 4 per cent of total loans of these entities as recently as March 2014, rose dramatically to 27 per cent by December 2015. Fitch estimates that loan-book exposure to microfinance accounted for about 30 per cent of loans at end-March 2015 at 10 listed NBFIs. The release said that Fitch believes that lending to this segment is likely to be more susceptible to asset-quality deterioration during periods of economic stress.

Furthermore, Sri Lanka continues to lack a comprehensive regulatory and supervisory system for the microfinance sector. As a result, many of the large number of institutions engaged in the provision of microfinance are unregulated. Efforts to introduce such regulations have been ongoing for many years, including the passing of a microfinance bill. “Fitch maintains that the passage of prudential regulatory requirements on microfinance entities should be positive for the financial sector,” the release said. Fitch-rated NBFIs have made efforts to manage the risk of their significant exposures to microfinance through product structuring, regular collections and close contact with borrowers.

Lending rates on microfinance are also generally high, due to the greater credit risk of this type of lending. “Nonetheless, the rising exposure to microfinance points to increased risk for NBFIs, especially during a period when operating conditions could become more challenging for the financial sector as a whole,” it said. While Fitch expects Sri Lanka’s real GDP growth to remain relatively high at above 5 per cent through 2017, the outlook for the financial sector is largely dependent on the operating environment, and volatility remains a key risk in the economy.