Lanka Rating Upgrades Entity Rating of Sarvodaya Development Finance PLC

Sri Lankan economy has witnessed a turnaround during 2024 after two years of economic and political uncertainty. With a GDP growth of ~5.2% in 9MFY25, other economic indicators have also improved. Agriculture and services sector have been the main drivers that have bolstered this growth. As the currency tends to stabilize and the policy rates in the single digit, inflation has also witnessed a significant drop (-4.0% YoY in January 2025). These economic factors have brought about a reduction in country as well as systematic risk. This economic recovery has, in turn, been beneficial for the Licensed Finance Companies (LFCs) in Sri Lanka. Total assets of the LFC sector grew by ~13.9% at the end of 9MFY25 while asset quality improved (Gross NPL ratio 9MFY25: ~11.3%; 9MFY24: ~18%) due to growing loans and advances and better repayment capacity of borrowers.

Sarvodaya Development Finance ("SDF" or the Company) is a small player in the LFC sector with strong presence and connectivity in the rural community. The rating reflects substantial growth in the Company's loan portfolio, improved profitability and strong liquidity position. The Company has managed to increase its MSME, lease and gold loan portfolio. The Company has high exposure to the agriculture and transportation segments with a large leasing portfolio of ~44% that focuses on agriculture-based leasing. The Company has entered into buy-back agreements with distributors to reduce the default risk on its leasing portfolio. The Company's net interest income has witnessed an increase of ~51% in 9MFY25 on YoY basis due to higher asset yields and comparatively lower funding cost. The Company clocked in a net profit of LKR~339mn in 9MFY25 (FY24: LKR~250mn). Liquidity is anticipated to improve as tranches from European Development Finance Institutions amounting to USD~3mn have already been realized. Further loans from international loans are in the pipeline that will diversify funding base. The limiting factor in the Company's rating is its small size and modest capital base. The Company has managed to maintain the gross and net non-performing loans (NPLs) below the industry average even though its target market constitutes economically vulnerable segment of the population. SDF's CAR stands at 19.7% with a net capital base of LKR~3.9bn as at 9MFY25. Going forward, successful credit management will remain critical for the Company.
The rating is dependent upon the Company's ability to preserve its unique accessibility to the rural segment in the island. Sustaining its growth momentum while improving margins will be key for the Company. The rating will rely on the successful execution of the Company's strategy to grow its asset base while preserving the asset quality. Any notable increase in credit risk, resulting in higher provisioning expenses, could negatively affect the rating.

About the Entity
Sarvodaya Development Finance PLC (SDF) is a public limited liability company incorporated and domiciled in Sri Lanka and is a licensed finance company regulated under Companies Act No. 07 of 2007 and the Finance Business Act No. 42 of 2011. The largest share of the company is owned by Sarvodaya Economic Enterprises Development Services (Gte) Ltd, with an ownership of 36%, while the Sarvodaya Movement collectively owns ~55% of the Company. The management team is headed by the Chief Executive Officer, Mr. Jayanetti, who has experience in business management and strategic leadership in the banking and financial sectors.