Lanka Rating Upgrades Entity Rating of Lanka Credit and Business Finance PLC

After a period of economic and political turbulence, Sri Lanka's economy demonstrated a notable recovery in 2024. The first nine months of FY25 saw GDP growth of roughly 5.2%, fueled by strong performance in agriculture and services sector. Economic indicators improved significantly, including currency stabilization, single-digit policy rates, and a sharp decline in inflation (-4.0% YoY in January 2025). This positive shift has lowered both country and systemic risk, benefiting Sri Lankan Licensed Finance Companies (LFCs). The LFC sector experienced asset growth of ~13.9% and a substantial improvement in asset quality with the gross NPL ratio falling to about 11.3% in 9MFY25 (FY24: ~14.7%). This was due to increased size of lending portfolio and better repayment capacity of the borrowers. CBSL's master plan for consolidation of NBFIs Phase-II has been revised and is underway now.
Lanka Credit & Business Finance PLC (“LCBF” or “the Company”) remains a small player in a very competitive LFC sector in Sri Lanka. It offers various financial services, while having primary focus on term loans, lease and gold loans. The Company has identified agriculture and tourism sectors for its future growth. LCBF has plans of further expansion by establishing branch network in the rural areas of the island to increase its foothold in agrarian communities. LCBF intends to tap into the microfinance segment by providing bulk loans to the cooperative societies. The ownership structure holds a prevalent role in the Company's stability. The parent company and major shareholder, Lanka Credit and Business Limited ("LCBL"), provides support in terms of capital infusion and management expertise. LCBF potential merger with Lanka Cooperative Leasing Company ("LCLC") was called off. LCBF's net interest income saw an increase of ~27% in 9MFY25 on YoY basis due to better asset yields and lower cost of funds. LCBF's profitability remains modest as it posted a net profit of LKR ~138mn in 9MFY25 (FY24: LKR ~111mn). LCBF is expected to maintain adequate liquidity with cushion in unutilized borrowing lines. However, the Gross NPLs have been oscillating above the industry average for the last four years despite having a relatively small lending portfolio. During 9MFY25 Gross NPLs of the Company were recorded at ~15.3% whereas the industry average was ~11.3%. The NPL ratio for the fresh disbursements during the last one year is ~4.5%. The Company has net capital base of LKR~3bn, meeting the minimum capital requirement. The Company as of 9MFY25, has maintained a score above the threshold requirement under the CBSL's revised master plan for consolidation of the sector.
The rating is dependent on the management's ability to navigate through low-interest rate environment and insulate the asset quality from further deterioration while maintaining the growth momentum. Reducing non-performing loans (NPLs) in line with the industry is important. Any pronounced increase in credit risk, resulting in higher provisioning expenses, could negatively affect the rating.

About the Entity
Lanka Credit & Business Finance PLC (“LCBF” or “the Company”) is a Public Limited Liability Company. LCBF was incorporated on 5th September 2016, and domiciled in Sri Lanka under the Companies Act No. 07 of 2007. The company is approved under Finance Business Act No. 42 of 2011 and is listed on Colombo Stock Exchange. LCBF (formerly known as City Finance Corporation Limited) was restructured as a result of an investment made by Lanka Credit and Business Limited (LCBL) under the guidance of the CBSL in May 2018. The Company's ultimate parent and controlling party is LCBL which is incorporated in Sri Lanka.