LRA Assigns Initial Entity Rating to the Regional Development Bank

The rating reflects sovereign ownership of the bank, its well-established network and adequate performance over the years. The rating is constrained by relatively high non-performing loans, stretched capital (Tier 1 capital) and the Bank's exposure to economically vulnerable segments based on its mandate. Regional Development Bank ("RDB" or "the Bank") is a state-owned Licensed Specialized Bank (LSB) in Sri Lanka, operating with the mandate of economic development by granting financial assistance to Microfinance Institutions and Small & Medium Enterprises. The Bank provides loans to Industry, Commercial, Agriculture and Individual segments. As at End-Sep'23, the Bank's Non-Performing loans (NPLs) increased to ~13.42% (CY22: ~9.66%), surpassing the Industry average of ~10.1%, reflecting higher credit risk. A sizable portion of the Bank's GLP is represented by securitized loans, i.e., pawning (~22% in 9MCY23), which has low infection ratio. The Bank's earnings profile is represented by adequate net interest spreads. However, impairment charges and implementation of increased VAT on Financial services exerted pressure on the net profitability of the Bank. RDB follows a cautious approach towards repricing its assets especially amid changing interest rate environment, given its specified mandate. Alternatively, the Bank strategizes on investing in Government Securities to augment the asset yields and maintain the target spread. RDB's funding mix, on the other hand, is dominated by short-term fixed & saving deposits, largely granular in nature with a depositor base of over ~6.8mln. With the average cost of funds between 10%-12%, the Bank intends to sustain its core spread between 4% - 5%. RDB's Tier-1 capital adequacy ratio (CAR) remains stretched and stands at 8.72% in 9MCY23. During CY22, Tier-1 capital dropped below the 8.5% minimum regulatory requirement to 8.29%. Meanwhile, total CAR remained well above the regulatory benchmark of 12.5% (16.1% in 9MCY23). In terms of liquidity, the Bank remains compliant with the CBSL's statutory liquidity requirements, however liquid assets as a percentage of the Bank's funding base (deposits + borrowings) remained relatively low at ~29% in 9MCY23 (27% in CY22). The Bank's overall performance remained satisfactory during 9MCY23 as it posted a PAT of LKR~518mln during 9MCY23 (LKR~241mln in 9MCY22).
The rating is dependent on improving asset quality and profitability indicators of the Bank. Similarly, sustaining and strengthening capital profile of the Bank is important. Any adverse impact on capital and related regulatory ratios resulting in regulatory breach would have negative rating repercussions. Moreover, the Bank’s progress on meeting its earning targets, asset quality and having strong governance framework is critical.

About the Entity
Regional Development Bank ("RDB" or "the Bank"), is a fully state-owned Licensed Specialized Bank, established under the Pradeshiya Sanwardana Bank Act No. 41 of 2008, providing financial assistance to Microfinance Institutions and Small and Medium Enterprises . The Board of Directors consists of nine (9) Non-Executive Directors, out of which five (5) are Independent Directors. The Chairman of the Bank, Mr. W.A.D.S.Gunasinghe, was appointed in October 23. He has served in a number of Ministries in various posts. Mr. P.S. Edirisuriya is the Acting CEO/GM of the Bank since Sep'22. He is assisted by a well-experienced Management Team.