Tighter regulation in Sri Lanka on classification and measurement of credit facilities for finance and leasing companies (FLCs) will accelerate recognition of bad loans in 2020-2022, which is likely to exert pressure on FLCs’ capitalisation due to the knock-on effects on their profitability, Fitch Ratings says.
Nonetheless, the more stringent norm will strengthen reporting standards and transparency, contributing to the sector’s stability in the longer term.
Under the new rules, FLCs will be required to recognise credit facilities repayable on a monthly basis that are more than 120 days past due as regulatory non-performing loans (NPLs) with effect from April 1,2021 and credit facilities repayable on a monthly basis that are over 90 days past due as NPLs from 1 April 2022.
This is more stringent than the existing standard, which recognises credit facilities overdue by more than 180 days as NPLs.
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