RFC’s gradually recovering - RAM

The registered-finance-company (RFC) sector has been gradually recovering from the weakened economic climate that prevailed in 2008 and 2009 and the confidence crisis triggered by the fall of an unregulated finance company, RAM Ratings (Lanka) latest report said.

As opposed to the previous financial year, FYE 31 March 2010 and the ensuing six months ended September 30, 2010, RFCs’ showed an acceleration in loan growth across the industry, supported by the opportunities of the post-war era and the more favourable macroeconomic conditions.

The expansion in the loan base has resulted in the moderation of liquidity and capitalisation levels; however, these levels are adequate. Asset quality remains weaker than that of banks, as the sector caters to a high-risk segment; nevertheless, there has been increasing awareness among most RFCs to improve asset quality.

Meanwhile, the sector has benefitted from the falling interest rate scenario that has increased margins due to deposits repricing faster than loans.

With regard to the latter, lending by RFCs is generally long-term in nature at fixed interest rates, with hire-purchase and leases making up 64.73 percent of the industry’s loan portfolio as at end-September 2010.

The broader margins, coupled with loan expansion and lower provisioning charges, have resulted in improving performance.

Going forward, asset quality is expected to improve amid the more favourable economic conditions. In addition, RFCs have taken steps to reduce the incidence of bad loans and rein in bad debts; together with the improving macroeconomic conditions, these steps are expected to aid asset quality improvement.

In line with the improving asset quality and opportunities for RFCs following the post-war era and the easing of interest rates, performance is expected to ameliorate as well.