Oct 29, Colombo: Fitch Ratings has assigned Sarvodaya Development Finance Limited (SDF) a National Long-Term Rating of ‘B+(lka)’. The Outlook is Stable.
SDF’s rating reflects its weak financial profile, particularly the pressure on its capitalisation and leverage caused by deteriorating asset quality and a high-risk appetite. The rating also captures SDF’s small franchise and less established and evolving business model among finance and leasing companies.
Our assessment of the operating environment for Sri Lankan finance and leasing companies incorporates the negative repercussions from the pandemic-related economic downturn on the company’s largely sub-prime clientele.
We regard SDF’s risk appetite as high due to its evolving underwriting standards and risk controls, which are not commensurate with its expanding operating scale.
We see further downside risk to SDF’s weak asset quality in the near- to medium-term due to the unseasoned nature of its portfolio and the economic fallout from the pandemic. SDF’s six-month reported regulatory non-performing loan (NPL) ratio continued to rise sharply to 11.9% in the financial year ending end-March 2020 (FY20), from 9.0% in FY19, and impaired loans (stage 3 loans) increased to 24.8%, from 17.6%.
We believe rising credit costs will dampen SDF’s profitability in the near to medium term, with a pre-tax return on assets ratio of 3% in FY20, but some pressure may be eased with better cost efficiencies. SDF benefits from high yields, but relies on high-cost wholesale borrowings for incremental funding due to its current inability to raise deposits. This weakens its pre-impairment operating profit buffers.