Rising Risk

Sept 25, 2008 (LBO) – Sri Lanka’s finance companies, especially smaller ones, could face difficulties in raising funds to maintain liquidity if the present high inflation and interest rate scenario continues, Fitch Ratings has warned.

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The rating agency said in a statement that the sector outlook is ‘Stable’ to ‘Negative’ but smaller Registered Finance Companies (RFCs) with weak deposit franchises and low support elements may face negative rating actions.

The agency said that the ratings of well capitalised RFCs with an established franchise should remain unchanged in the short to medium term as they should be better able to weather the current weak macroeconomic conditions.

“Fitch notes that whilst RFCs are currently meeting the statutory minimum central bank liquid ratio of 15 percent, maintaining liquidity could become a challenge in a scenario where deposit growth slows or contracts, and asset quality weakens substantially over a short time horizon.”

Rising interest rates since late 2006 and high inflation has reduced credit quality in the sector, with its client base coming mostly from the relati