Fitch Assigns Asia Asset Finance a First-Time Rating of ‘A+(lka)’
By: Staff Writer
February 08, Colombo (LNW): The operating environment for the Sri Lankan finance and leasing company (FLC) industry is expected to continue to stabilise, following the inflation and interest rate shocks over the past two years, Fitch Ratings said yesterday.
It noted that the easing inflation and interest rate pressures should provide steadier conditions for the FLC sector performance.
“Some headwinds linger, as higher taxes will continue to weigh on household finances in 2024. Investor confidence will also take time to recover. Nonetheless, we expect the economic activity to improve in FY25 as GDP growth recovers,” the rating agency said.
Fitch shared its take on the local FLC sector in the rating action commentary of Asia Asset Finance, a 72.9 percent-owned subsidiary of India-based Muthoot Finance Ltd (MFL, BB/Stable).
Fitch ratings gave the entity a first-time rating of ‘A+(lka)’, with a stable outlook.Its core business is in gold-backed lending, similar to its parent. Asia Asset Finance has a small market share of 1.6 percent of the total FLC industry assets.
Fitch Ratings said Asia Asset Finance’s rating reflects its expectation that MFL would provide extraordinary support to its subsidiary, if required.
The agency said it believes MFL has the financial ability and incentive to provide support, given its majority shareholding, record of capital infusions and strategic and operational alignment in its subsidiary’s core product – gold-backed loans.
“This is counterbalanced by Asia Asset Finance’s small size and contribution to MFL, limited brand sharing and different operating jurisdiction,” it said.
Asia Asset Finance’s business model aligns with MFL’s core product of gold-backed loans, following its transition from vehicle financing and unsecured loans. MFL has a clear influence on Asia Asset Finance’s business strategy and maintains oversight of execution at the board level.
The shareholder also appoints three non-executive directors on Asia Asset Finance’s eight-member board and has seconded an employee to head its gold-loan internal audit team. Nonetheless, some differences remain due to the entities’ separate jurisdictions and local market practices.
Adequate Ordinary Capital Support: MFL has provided adequate and timely capital support to Asia Asset Finance since it acquired the company in 2014.
It infused around LKR400 million in 2019 to support the subsidiary’s business growth. A further LKR413 million was infused in 2021 to meet the increased minimum regulatory capital requirement of LKR2.5 billion for Sri Lankan FLCs, ahead of the stipulated compliance deadline.