The long term rating of People’s Merchant Finance Company has been upgraded from B+ to BBB-, on the strength of its t company Peoples Bank.

Its short-term rating has also been revised from NP to P3, and People’s Merchant has been given a stable outlook, RAM Ratings said Thursday.

People’s Merchant Finance in a small registered finance company with an asset base of 299.67 million rupees as at end march 2009.

"The steep upward revision of the company’s ratings is premised on the financial flexibility derived from its new ultimate, state-owned parent, People’s Bank."

Earlier this year, Peoples Merchant Bank (PMB) picked up a 99.90 percent stake in what is now Peoples Merchant Finance.

Peoples Merchant Bank - a leasing business is an associate company of the second largest commercial bank in Sri Lanka, People’s Bank, which owns a 39.20 percent stake.

Peoples Bank is the largest funding source for PMB.

As at end-March 2009, Peoples Bank had given 660 million rupees of facilities to PMB, which accounted for about 45 percent of its bank borrowings.

PMB has also announced a rights issue for which its parent has already pledged support. It intends to raise 250 million rupees to retire its outstanding debentures and other short-term borrowings.

Peoples Merchant Bank has announced that it intends to amalgamate the assets and liabilities of the finance company by the financial year ended March 31, 2010.

"While we note that the integration process is likely to introduce additional risks, we also acknowledge that the quality of Peoples Merchant Finance Company’s loans is poised to improve as it adopts PMB’s underwriting standards," RAM Ratings said.

Absolute gross non-performing loans of Peoples Merchant Finance surged 285.02 percent to 700.51 million rupees as at end-September 2009.

"Although this had been largely due to weaker economic fundamentals, RAM Ratings Lanka expects the Company’s NPLs to ease over the medium term, in line with the expected economic recovery." –(LBO)