"The rating actions reflect PMB's weakened financial profile in terms of its profitability, asset quality and solvency," Fitch said.

But Fitch said it takes comfort in PMB's main shareholder, the state-owned People's Bank which has a 'A(lka)' rating, and holds 39 percent of PMB's equity and has board level linkages with it.

PMB's gross non-performing loan (NPL) ratio rose sharply to 29.2 percent at the third quarter of the 2010 financial year, stemming mainly from a significant increase in delinquencies in its loan portfolio.

The gross NPL ratio for the group stood at 31.2 percent, which was compounded by the poor asset quality of its subsidiary, People's Merchant Finance Company, formerly Silvereen Finance Company, a troubled, small family-held registered finance company acquired by PMB.

PMB is currently awaiting approval from the Central Bank to merge with PMF, and become a registered finance company (RFC).

Fitch said it notes that PMB's NPLs continued to increase into the fourth quarter.

The company incurred losses of 20 million rupees in the third quarter, mainly due to depressed interest income.

Group's losses for the same period at 107 million rupees, mainly reflecting the losses at its subsidiary, PMB Credit Card Company, which acquired ABC Credit Card Company, an unregulated company which issued credit cards and accepted deposits that got into trouble in 2009.

PMB's investment in subsidiaries accounted for 11 percent of the company's assets as at the end of the third quarter.

Fitch said that a PMB rights issue that raised 250 million in the fourth quarter would improve its capitalisation, solvency as measured by net NPL/equity is expected to remain weak.

As a specialised leasing company, PMB is predominantly financed by borrowings which accounted for 81 percent of funding.

"Fitch expects PMB's funding diversity to improve following the merger with PMF, as the RFC licence would enable deposits to be accepted from the public."

Established in 1983 and listed in 1994, PMB is a specialised leasing company accounting for 2.4 percent of the specialised leasing sector assets in Sri Lanka as at March 2009.

The company is an associate of People's Bank which owns 39.2 percent of its equity.