LRA Assigns Initial Entity Rating to SMB Finance PLC.

SMB Finance PLC ("SMBF" or "the Company") operates as a public listed Licensed Finance Company (LFC) with primary focus on leasing, term loans and gold loans. Prior to Dec'22, SMBF was a specialized leasing company (known as "SMB Leasing PLC") dealing in the core business of leasing. SMBF obtained its finance business license in December, 2022. The Company has undergone several changes in its ownership structure since its inception. Mr. Wijaratne, a veteran businessman with investments in industries such as entertainment, cargo terminal and real estate, is the single largest shareholder (~64%) of SMBF since 2021. The rating takes account of SMBF's recent placement in the LFCs sector, which is reflected by very small share of ~0.3% in the sector's asset base and ~0.2% in the sector's loan portfolio. In terms of lending portfolio, SMBF's outstanding loans are a mix of its fresh disbursements as well as the legacy loans carried forward from its loan portfolio of Seylan Merchant Bank until 2010. A restricting factor for the rating is the considerably higher Non-Performing Loans (NPLs) of SMBF stemming not only from the legacy portfolio but also from the fresh book. SMBF's Gross NPLs rose to ~36% in CY23 (~24% in CY22) significantly above the average Industry NPLs of ~20% in 6MFY24. Furthermore, NPLs from the fresh loan portfolio also stood at a very high level of ~38% as at CY23 and the NPLs from old portfolio were ~97%. SMBF's overall portfolio declined by ~11% recording at LKR~2.2bn in CY23. On the other side, SMBF's NPLs remain well covered with ~86% provision coverage in CY23 (~106% in CY22), which bodes well for the Company. SMBF has a strong capital structure, following the injection of capital through the rights issue of LKR~2.1bn in CY21 to meet the core capital requirements of LFCs as set out by the CBSL. SMBF's external funding majorly comprises of bank borrowings, i.e., LKR~1.5bn (CY23) and a nominal portion of public deposits (LKR~42mn as at CY23). Meanwhile, SMBF's asset base includes a significant portion of liquid assets, i.e., placements with banks (LKR~2.5bn as at CY23) along with its lending portfolio. The liquidity profile of SMBF, therefore, remains sound as a large portion of its investments are backed by its internal capital. While liquidity and capital profile remain promising, the rating takes into account relatively small size of SMBF's lending portfolio, coupled with a rising credit risk and the LFC's yet to be implemented growth plans and franchise value. The rating also factors in the inadequacy of a formal risk management framework to ensure adequate controls and operational procedures in place.
The rating is dependent on SMBF's ability to turnaround its deteriorating asset health and ensure a sustainable business growth model. Any further dip in the credit quality or weakened growth prospects will have a negative impact on the rating. Meanwhile establishing sound risk management framework, advanced technological framework and strong operational practices remains critical.

About the Entity
SMB Finance PLC ("SMBF" or "the Company") is incorporated and domiciled in Sri Lanka and listed on the Colombo Stock Exchange. The main shareholder, Mr. H R S Wijeratne, holds ~64% stake in the Company. He is also the Chairman of the Board of Directors. The principal activities of SMBF involve accepting deposits and granting loans mainly term loans, leases and gold loans. The Board of Directors consists of six members of which five are Non-Executive Directors which includes four Independent Directors. The CEO Mr. Supul Wijesinghe has been with the LFC for seven years and has a plethora of related experience and qualifications.