Sri Lanka’s Industrial Finance may have to relax credit policies to grow faster: Fitch

Sept 13, (LBO) – Fitch Ratings has given a BB+ (lka) rating with a stable outlook for Industrial Finance Limited (IFL), a company which operates mainly in Sri Lanka’s western province, but the agency said it may have to relax credit policies and boost capital if it wanted to grow faster. Though the company had good indicators, Fitch said its size constrained the rating. BB+ is a below investment-grade rating.

“IFL’s rating reflects its good profitability, conservative credit policies, and good asset quality,” Fitch said.

“However, IFL’s rating is constrained by its limited customer franchise, low product diversity and its relatively small size.

These factors reduced its risk diversification and increased its overall market and credit risks.”

In the last financial year assets grew by 46 percent and a low non performing loan ratio of 5.7 percent in 2006 financial, showed that the firm followed stringent credit policies.

“Fitch notes that in order to achieve its growth expectations, it would be necessary for IFL to relax its present stringent credit policies in order to accommodate any new clients,” Fitch said.

“IFL’s overall profitability was robust, with the company enjoying reasonably comfortable net interest margin of 11.9 percent in FY06 compared to 11.2 percent in FY05, coupled with its relatively low cost structures.

IFL is primarily focused on financing commercial motor vehicles to small- and medium-sized enterprise clients.

The agency says IFL’s small equity base (81 million rupees in the 2006 financial year) heightens its vulnerability to the possible erosion of capital from non performing loans and needs to boost capital to the Central Bank requirement of 100 million rupees by January 2007 and 200 million by July 2008.

IFL’s management has told Fitch that the firm is considering a rights issue in late-2006 and a private placement thereafter.
IFL’s lending portfolio of 421 million rupees put it among the smallest players within the non-bank financial institution sector with 55 percent in finance leases, and 38 percent in hire purchase agreements.

Industrial Finance had 43.4 percent cost to income ratio in FY06.

Fitch expects IFL’s spreads to narrow somewhat due to competition but nevertheless remain healthy.

Established in 1962, IFL is a registered finance company in which more than 68 percent of voting shares are owned by the Tudawe and de Costa families, who have interests in construction, apparel manufacturing and hospitals. .