Rising gold-backed loans elevate risks for Sri Lankan Finance Companies

Fitch Ratings-Colombo/Hong Kong-20 November 2023: Rising gold-backed lending among Sri Lanka’s finance and leasing companies (FLC) sector is exposing financiers to higher collateral price risk and making them more susceptible to any adverse movements in gold prices, says Fitch Ratings.

Sri Lankan FLCs have grown gold-backed loans rapidly in the past several years amid shrinking demand for their core vehicle-financing business. Gold-backed loan balances more than quadrupled between the financial year ending March 2019 (FYE19) and FYE23, raising its share in the sector’s gross loans to 18%, from 4% at end-FY19.

We believe several factors have fuelled this trend, including rising demand for shorter-term financing from borrowers, relatively high product yields, and the liquid nature of gold collaterals that allows lenders to recover defaulted facilities through regular auctions.

FLCs cut back their exposure to gold-backed lending in 1QFY24, but we view this as temporary, as it stemmed partly from a drop in local gold prices in 1QFY24 following the global price decline, exacerbated by Sri Lankan rupee appreciation during the period.

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