BANKING AND FINANCE
Compiled by Savithri Rodrigo
Q: How would you describe the performance of the banking and finance sector in the island?
Ramesh Jayasekara (RJ): Post the Easter Sunday attacks, COVID-19 has further dampened the sector and economy.
Eshanth Wijesinghe (EW): The sector has continued to display resilience and success in these unprecedented times.
Q: Which finance business segments display the most promise, in your opinion?
RJ We were bullish on exports and trading but with COVID-19, essential goods and the manufacture of personal protective equipment (PPE) display promise in the present context.
EW Mobile banking and microfinance reflect the most promise – especially the former, which has seen unprecedented initiatives come into play.
Q: Do you expect macroeconomic pressures to put a strain on finance companies’ credit metrics?
RJ Many factors will place NBFIs under severe stress including increases in core capital requirements and NPAs, and new SLFRS provisioning requirements.
EW The coronavirus pandemic has impacted every single credit matrix across the world and we certainly won’t be exempt from these pressures.
Q: What are the issues facing the sector?
RJ The slowdown of domestic economic activity, increase in NPAs and fallout from the COVID-19 pandemic are serious concerns.
EW There would be an eradication of conventional banking models. For instance, retail banking will experience a complete transformation.
Q: How have recent currency movements impacted your sector?
RJ The dollar remained relatively stable in 2019. As long as currency depreciation is predictable and consistent, it can be managed. However, the sudden depreciation or appreciation of a currency is a challenge. Maintaining a stable currency policy is important for importers and exporters.
EW Volatility in the market is a given. But major shifts in currency movements destroy strategies and targets. The rapid depreciation of the rupee as witnessed in the last few months is symptomatic of the overriding environment.
Q: Could you highlight the main concerns on the regulatory front?
RJ The capitalisation of banks was a Basel III priority. Many raised capital through rights issues and subordinated debt instruments. Available capital will dictate portfolio growth. Therefore, banks will need to focus on capital consumed, and risk and return. Liquidity coverage and leverage ratios have been introduced through Basel III regulations.
EW The budget deficit, the ballooning debt burden and government revenue models. Presently, with the economy
not performing too well due to the challenges posed by COVID-19, the landscape for the above-mentioned concerns will undeniably be more expansive than previously believed.
Q: How are the Basel III capital requirements impacting your sector?
RJ With capital efficiency being the core principle of Basel III, banks had to significantly capitalise for its adoption with much greater capital planning being required. Return on capital employed (ROCE) must be considered before agreeing to on board a loan.
EW The follow-on effect of Basel III requirements is impacting access to finance and an increase in lending rates. Unfortunately, it does not take the socioeconomic markets and infrastructure of emerging countries into consideration.
Q: What do you make of calls for environmental and social risk management, and sustainable financing practices?
RJ Environmental and social risk management is important in the prevailing context. There is a common consensus for our sector to adopt these policies with lending guidelines. Facilities will not be extended to those who do not conform to them.
EW I am a firm believer in all of this. Coupled with environmental and social risk management, the ever-changing and dramatic landscape is rapidly proving that sustainable financing practices are non-negotiable.
Q: Is the financial services industry doing enough to promote e-commerce?
RJ The banking sector is pushing for the long term and will only garner returns in the next three to four years. Despite expansive mobile phone connections, digital and mobile phone banking penetration is low.
Banks must continually invest with long-term ROIs.
EW Although the initial steps have been taken, a more concerted effort is required in this regard. Given the quality of human capital, we can be more impactful and inclusive in viewing e-commerce as a way of life in Sri Lanka.
Q: How would greater use of technology and digital transactions increase business for the sector?
RJ While digital penetration is low at around 10 percent, this will increase to 40 percent in the next decade. Amid higher technology usage, digital banking will increase and transaction costs would reduce substantially, with more customers moving to digital platforms and channels.
EW Younger generations have all but lost faith in traditional bricks and mortar banking and finance. They’re looking to redesign and create a whole new ecosystem. Therefore, technology and digital transactions will undoubtedly replace and disrupt banking as we know it today.
Q: What is your take of the progress made vis-à-vis financial inclusion in Sri Lanka?
RJ Sri Lanka ranks high among South Asian countries when it comes to the number of bank account holders. Access to finance is key to eliminate poverty and the Central Bank of Sri Lanka is making headway in its National Financial Inclusion Strategy.
EW Microfinance and mobile banking hold immense promise in terms of financial inclusion. However, while efforts are being made, we’re yet to reach the impressive levels we have dreamt of.
Q: Is the sector likely to consolidate and reshape itself going forward?
RJ I foresee consolidation in the NBFI sector – although this may not be the case for the banking sector.
EW Consolidation and reshaping is the future, no matter how much opposition there is to change.
Q: What avenues are available for the sector to innovate and expand – and what’s on the horizon for the sector?
RJ There is immense potential for tech companies to team up with banks. And there are immense prospects too for leveraging on synergies. AI, big data, robotic process automation and blockchain are some technologies being used by the financial services industry.
EW Many reputed and longstanding companies offer customised solutions that the financial services industry can take advantage of. Fintech, IoT, blockchain and a host of avenues are available to leapfrog into the future.