LRA Maintains Entity Rating of Regional Development Bank

RDB is a state-owned Licensed Specialized Bank (LSB) in Sri Lanka that operates with a focus on economic development by providing financial assistance to Microfinance Institutions and Small and Medium Enterprises. The Bank provides loans across various sectors, including industry, commercial, agriculture, and individual segments. Overall economic conditions have improved in Sri Lanka resulting in relatively better performance of financial institutions in the country including LSBs. The rating reflects the Regional Development Bank's (“RDB” or “the Bank”) sovereign ownership, adequate performance and its exposure to economically vulnerable segments based on its mandate. The interest rates in Sri Lanka have dropped to single digits. This led to increased Net interest income (NII) of the Bank to LKR~19.5bn in CY24 (CY23: LKR~16.9bn). The core spread has been improved to ~6.4% in CY24 as compared to ~3.5% in CY23 due to lagging repricing of assets. However, higher operating expenses and taxation has exerted pressure on the profitability. RDB's Profit After Tax (PAT) stood at LKR~1.3bn in CY24 (CY23: LKR~0.86bn), mainly driven by an impairment reversal of LKR~0.83bn. As of CY24, the Bank's Non-Performing Loans (NPLs) improved to ~10.76%, down from ~13.75% in CY23. This was based on growth in advances portfolio (~16.5%) and better recoveries.
RDB has altered its investment mix amidst changing interest rates towards fixed deposits to augment investment yield. The funding mix is dominated by short-term fixed and savings deposits, supported by a depositor base exceeding LKR~253.6bn. The average cost of funds ranges from ~6% to ~7%, with the Bank's core spread also falls between ~6% and ~7%. Despite a Capital Adequacy Ratio (CAR) of ~15.66% in CY24, Tier-1 capital has dipped to ~9.65%, but remains above the minimum regulatory requirement of ~8.5%. In terms of liquidity, the Bank meets the CBSL's statutory requirements; however, liquid assets accounted for only ~23% of the funding base in CY24, down from ~32% in CY23.
The Bank is in the process of filling certain key positions at senior level. Timely hiring and integration of these in the management team is important for sustainable performance, going forward.
The rating is dependent on improving the Bank's profitability indicators. Similarly, sustaining and strengthening its capital profile is crucial. Any adverse impact on capital and related regulatory ratios, leading to a regulatory breach, would have negative rating repercussions.

About the Entity
The Regional Development Bank (RDB) is a fully state-owned Licensed Specialized Bank, established under the Pradeshiya Sanwardana Bank Act No. 41 of 2008. The Bank is dedicated to providing financial assistance to Microfinance Institutions and Small and Medium Enterprises. RDB's governance structure comprises a Board of Directors with 8 Non-Executive Directors, 7 of whom are Independent Directors. The Chairman, Mr. A.P.L. Fernando, has been in this role since November 24 and brings extensive experience from various organizations. The Acting CEO and General Manager since 2024, Mr. E. A. D. Janitha Priyashantha, is supported by a seasoned Management Team.