Dec 13, 2010 (LBO) - Sri Lanka's finance companies, the island's sub-prime lenders, have returned to profits and strengthened capital, but bad loans were still high as the sector recovered from a downturn, a report by the regulator shows.
Bad loans at registered finance companies rose to 11.7 percent of gross loans by June 2010, up from 10.2 percent in 2009.
In 2009 bad loans deteriorated sharply from 6.7 percent a year earlier. Capital adequacy plunged from 14.0 percent 9.8 percent. But by June 2010, capital adequacy rose to 10.4 percent.
Sri Lanka's finance companies were the most badly hit from money printing and interest rate manipulation that began in 2004. The state suppressed interest rates to help deficit spending and fired a massive housing bubble, with inflation rising to 29.9 percent at one time.
But the Central Bank started tightening monetary policy from 2007 and bringing stability back slowly.
The housing bubble burst in 2008 amid a balance of payments crisis and a collapse on an unregistered financier in the Ceylinco group, triggered a run on weaker finance companies initially starting with Ceylinco group firms.
The relative strengths of Sri Lanka's registered finance companies (RFCs) vary widely, from 'A' rated firms like Central Finance to below investment grade firms that are flirting with default.
The sector as a whole, lost money in 2009 as return on assets (before tax) fell to -0.8 from 1.8 percent in 2008. By June 2010 return on assets had improved to 9.2 percent.
"The profitability of the RFC sector has now moved into positive territory," the Central Bank said.
"The RFC sector has benefitted from the decline in interest rates."
Return on equity (after tax) also fell to a negative 13.6 percent in 2009 from 8.4 percent a year earlier. By June ROE was 8.2 percent.
Total profits had recovered to 2.1 billion rupees in the first half from losses of 2.1 billion a year earlier, though some firms were still making losses, the Central Bank said.
Losses dragged capital adequacy to 9.8 percent in 2009 from 14.0 percent a year earlier. By June capital adequacy was back at 10.4 percent.
Deposits and loans were also growing. Total lending had grown 14.0 percent to 132 billion rupees by June, compared to a sluggish 0.5 percent growth a year earlier.
Deposits had grown 9.5 percent to 131 billion rupees by June compared to an increase of 1.6 percent a year earlier.
source - www.lbo.lk
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