INSUBCONTINENT EXCLUSIVE:
(NBFIs), says Fitch Ratings.The plan avoids direct impact on the local-currency government debt holdings of NBFIs and commercial banks,
pose downside risk to the sector.The government debt holdings of Sri Lankan NBFIs mainly comprise local-currency treasury securities to meet
regulatory liquid-asset requirements and for investment returns
Finance and leasing companies (FLCs) have boosted government debt securities holdings amid a weak economic outlook, lacklustre lending
opportunities and a preference for stronger liquidity buffers at a time of extreme market uncertainty.Such holdings are not excessive, at
around 8% of sector assets at end-March 2023 (end-March 2020: 5%), but any direct impact from a government restructuring plan would have
These securities also comprise a larger proportion of banking-sector assets, and any losses arising from a restructuring could have further
Foreign-currency denominated Sri Lanka Development Bonds will be subject to restructuring, but Fitch-rated NBFIs have no exposure to these
dependence on banks as a funding source
FLCs sourced approximately 73% of total non-deposit funding from other financial institutions as at end-March 2023, of which the bulk would
Similarly, banks are major funding providers for other NBFI sub-sectors, such as securities firms
domestic exposure.Sri Lankan NBFIs continue to face significant downside risks beyond those addressed in the recent proposal
while higher funding costs have crimped net interest margins and profitability
modest improvement in inflation, interest rate and exchange rate trends in recent weeks.Capital markets are likely to stay volatile despite
recent positive moves, keeping the financial prospects of securities firms less predictable in the near term
Any resistance from other government debt holders could also hold back the proposal and raise fresh doubts for the domestic financial
relative to other entities on the national ratings scale
Fitch Ratings says it would look to resolve the RWNs upon greater stability in the domestic economy and financial markets, and better
This could require more clarity on the final outcome of the debt restructuring, including on foreign-currency debt, and the impact on the
banking and corporate sectors.
