People’s Merchant Finance PLC

ICRA Lanka reaffirms the [SL]B rating of People’s Merchant Finance PLC; rating continues to remain under watch with developing implications

Instrument Rated Amount
(LKR Mn)
Outstanding Amount
(LKR Mn)
Rating Action
Issuer rating N/A N/A [SL]B reaffirmed; the rating continues to remain under watch with developing implications

Rating action

ICRA Lanka Limited, subsidiary of ICRA Limited, a group company of Moody’s Investors Service, has reaffirmed the issuer rating of People’s Merchant Finance PLC (PMF or the Company) at [SL]B (Pronounced SL B); the rating continues to remain under watch with developing implications.


The rating continues to factor the small scale and franchise, modest asset quality, limited funding diversity constrained by the LKR 2.5 Bn deposit and LKR 39 Mn borrowing cap imposed by the regulator and, its poor profitability indicators. ICRA Lanka takes note that the Company is not meeting the minimum core capital requirement (LKR 2.0 Bn as in Jan-20) for Licensed Finance Companies. ICRA Lanka expects Sterling Capital Investment (Pvt) Ltd (“SCIPL”/ the Parent, holding 68.2% shares of PMF), to support PMF in meeting the near term and future equity capital requirements. The rating continues to remain under watch with developing implications as capital infusion is expected in the near term to meet the regulatory core capital requirements of the Company. ICRA Lanka would closely monitor the improvement in PMF’s capital structure and its overall financial performance going forward and take appropriate rating action when required.

Key rating drivers

Credit challenges

Small scale of operations; Peoples Merchant Finance was incorporated in 1983 as an investment banking arm of Peoples Bank. Subsequently, the Company became a licenced finance company. Peoples Bank (“PB”) and its subsidiary Peoples Leasing and Finance PLC (“PLC”) were the main shareholders with 50.16% and 37.06% shareholding of the Company. In May-19, Sterling Capital Investment (Pvt) Limited (SCIPL) became the main shareholder by investing LKR 1.36 Bn through a private placement and a right issue and increased its stake to 68.02%. PB and PLC continue to maintain minority stakes of 16.06% and 11.86% respectively. PMF reported a gross portfolio of LKR 2.2 Bn in Dec-19. The Company’s portfolio consists of leasing (60%), loans (22%), margin trading (12%) and gold loans (6%). The Company sources its business through 11 branches including the head office and one pawning centre. In the medium term, the Company is expected to shift its portfolio towards leasing.

Modest asset quality; PMF reported a gross NPA of 26.02% in Dec-19 as compared to 11.66% in Mar-19 (9.83% in Mar-18). It was observed that the top 10 NPAs accounted for 25% of the total NPAs as in Dec-19. Ability to make recoveries, while controlling fresh slippages and improving the quality of the new credit originations would be crucial.

Limited funding diversification: The Company faces limitations on the ability to diversify its funding base due to the small scale of operations and regulatory caps of LKR 2.5 Bn on deposits and LKR 39 Mn on borrowings imposed on the Company. The Company presently reports a positive short term (less than 1 year) ALM mismatch of 16.54% (as a % of total assets) in Dec-19 supported to an extent by the LKR 1.36 Bn capital infusion made in May-19. The Company has invested the funds received from the rights issue in fixed income securities and it amounts closer to 47% of the total assets of the Company as in Dec-19.

Significant external capital required to meet regulatory core capital requirement in the medium term; PMF’s core and total capital adequacy ratio improved to 38.02% and 37.99% in Dec-19 as compared to 11.24% and 11.21% in Mar-19. The regulatory capital ratios improved with the LKR 1.36 Bn capital infused by SCIPL in May-19. The Company, however, continues to operate below the regulatory minimum Core Capital requirement. As in Dec-19, the Core Capital of the Company stood at LKR 1,286 Mn as compared to the regulatory requirement of LKR 1,500 Mn. In Jan-20, the regulatory requirement increased to LKR 2,000 Mn and in Jan-21 it would be LKR 2,500 Mn. ICRA Lanka expects support from SCIPL in securing the capital required. The timeliness of capital support to avoid further regulatory restrictions would be critical in the future.

Poor profitability indicators: PMF reported a net loss of LKR 94 Mn in FY2019 as compared to the loss of LKR 148 Mn reported in FY2018. For the 9MFY2020 also the Company reported a loss of LKR 59 Mn. The earnings profile is characterized by high operating expenses ratio (operating expense to average total assets) of 8.71% in 9MFY2020 as compared to 9.14% in FY2019 (5.67% in FY2018). The credit cost to average assets ratio increased to 4.13% in 9MFY2020 as compared to 0.96% in FY2019 (2.52% in FY2018) as its asset quality weakened. Ability to profitably scale up business going forward would depend on keeping asset quality under control and improvement in the operating efficiencies.

Analytical approach: For arriving at the ratings, ICRA Lanka has applied its rating methodologies as indicated below.

Links to applicable criteria:  ICRA Lanka Credit Rating Methodology for Non-Banking Finance Companies

About the Company:                

Peoples Merchant Finance was formerly known as Peoples Merchant Bank. The Company was incorporated in 1983 as the investment banking arm of Peoples Bank. Subsequently, the Company was registered under the finance business act and became a licenced finance company in 2012. Sterling Capital Investments (Pvt) Limited is the main shareholders with 68.2%shareholding as at date. The Company has 11 branches including its head office and one pawning centre.

During the year ended March 31, 2019, PMF reported a net loss of LKR 94 Mn on a total asset base of LKR 2.9 Bn as compared to a net loss of LKR 148 Mn on a total asset base of LKR 2.9 Bn in the previous fiscal year. For the nine months ended December 2019, the Company reported a net loss of LKR 59 Mn on a total asset base of LKR 3.6 Bn.


Mr Dasith Fernando +94 11 4339907 dasith   Mr Rasanga Weliwatte +94 11 4339907  
Mr A.M Karthik +91 44 45964308    


Mr W. Don Barnabas   +94 11 4339907  


Subsidiary of ICRA Limited

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Tel:+94 11 4339907;Fax:+94112333307;

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