LFCs urged to shift from consumption lending to industry-focused finance: LRA

• Lanka Rating Agency says LFCs must shift from consumption lending to financing industry, exports and capital formation
• Strong capital base, improving asset quality position LFCs to take on larger development role
• Sector profitability remains solid, with FY24/25 PAT at Rs. 69.4 b and rising credit demand supporting asset growth
• Key risks include liquidity pressures, gold-price volatility and interest rate mismatch, even as CBSL-driven consolidation continues

Sri Lanka’s licenced finance companies (LFCs) need to pivot from traditional consumption-led lending towards financing industrial and export-linked activity if they are to remain relevant in a changing economy, the Lanka Rating Agency (LRA) said in its latest sector review. 

The Agency argues that LFCs have the balance sheet strength and risk frameworks to play a more direct role in capital formation, as firms seek investment to raise productivity, add value, and compete internationally.

The LRA says the sector’s future influence will depend on expanding beyond vehicle loans and personal credit, and into areas such as project finance, industrial upgrading, supply-chain finance, and working capital for export production. 

These shifts, the Agency notes, would diversify LFC balance sheets while supporting national efforts to rebuild productive capacity. Moving into outward-oriented financing would also help strengthen corporate balance sheets, as Sri Lankan firms attempt to scale into regional markets and generate foreign currency earnings.

According to the LRA, institutions that reposition themselves towards industry-focused lending will be better placed to support more balanced and sustainable economic expansion. The Agency also underscores that credit risk vigilance and an ability to adapt to the Central Bank of Sri Lanka’s (CBSL) consolidation framework remain essential to stability.

The LRA’s sector analysis shows the industry is entering 2026 with stronger fundamentals. Regulatory capital rose to about Rs. 433 billion in the first quarter of FY25/26, supporting a capital adequacy ratio of roughly 22%. Sector assets reached around Rs. 2.28 trillion, growing at a compound rate of nearly 8%, while the gross non-performing loans (NPL) ratio fell to about 8.3% from 13.6% a year earlier. Profit After Tax (PAT) was Rs. 69.4 billion in FY24/25 and Rs. 18 billion in the first quarter of FY25/26.

The sector’s liabilities increased 29.1% year-on-year (YoY), with borrowings up nearly 76% owing to stronger deposit inflows. The CBSL’s NBFI Master Plan requires institutions to achieve a minimum stability score of 60 by 2027 if they intend to operate independently, signalling continued consolidation pressure.

The 12 largest firms hold close to 80% of sector assets, with loans and advances at about Rs. 1.75 trillion, or 76.6% of total assets. Leasing accounts for roughly 44% of the loan book and other loans for about 33%.

Liquidity and rollover risk remain concerns, as a high share of deposits and borrowings mature within a year. The sector is also exposed to commodity price swings after the gold portfolio expanded by around 30% in FY24/25, reflecting a 34% rise in gold prices. The LRA notes that about half of long-tenor assets are funded by short-term deposits, leaving firms sensitive to interest-rate movements.

Despite these vulnerabilities, the LRA maintains that LFCs are structurally well placed to support the shift towards an investment-driven growth model, provided they execute a strategic repositioning towards industrial finance and manage risks prudently.