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Methodology | Non-Banking Finance Companies Rating | Jun-22
Sector Study | Leasing & Finance Companies | Aug-23
LRA Maintains Entity Rating of Sarvodaya Development Finance PLC
Sarvodaya Development Finance PLC (SDF or the Company) rating reflects its strong presence and connectivity in the rural community. Over the years, the Company has improved its earnings. Despite the economic downturn and difficult macroeconomic conditions prevalent in the country in FY23, the Company earned its highest profit after tax of LKR 221.65mn (FY22: LKR 215.47mn). However, its profit after tax decreased significantly in 3MFY24 as SDF earned a profit after tax of LKR 10mn, a ~70% drop compared to the same period of the previous financial year. SDF's top net interest earnings diminished during FY23 by ~1.6% to LKR 1.24bn (FY22: LKR 1.26bn), as its interest expenses rose at a staggering rate in comparison to its interest income. The Company has high exposure to the agriculture and transportation segments in the country. Its main customer segment is the Small and Medium-sized Enterprises (SME). SDF also has a large leasing portfolio of ~47%, which largely focuses on agriculture-based leases. These segments are more susceptible to adverse effects of the economic conditions of the country. However, SDF has managed to enter into buy-back agreements with distributors to reduce the default risk of its customers. The Company struggles with its asset quality as Non-Performing Loans (NPL) increased in 3MFY24, after moderately dropping in FY23. SDF recorded 120 day and 90 day gross NPLs of ~17.4% (FY23: ~14.4%; FY22: ~15.9%) and ~21.8%, and a net NPLs of ~12% (FY23: ~9%; FY22: ~10.6%) and ~16.6%, respectively, as at 3MFY24. 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.
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. Currently, the Board of SDF consists of six non-executive directors, of whom, three are independent and three are non-independent directors. 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.