Richie Dias discusses how local banks need to gear up for transformation

Compiled by Ruwandi Perera

Q: What are the latest developments in the banking sector?
A: The pandemic was a defining moment in the evolution of banking and it paved the way for a convergence of trends that are reshaping the sector.

And to keep up with fintechs and other competitors, banks are rediscovering their creative mojo and asking a simple, powerful question: ‘Why not?’

Consumers – especially digitally savvy millennials and gen Z – demand access to financial services through digital channels. As a result, mobile banking has become a must-have feature of financial services institutions to remain competitive.

Sophisticated mobile banking tools are also a factor for the popularity of neo banks in some parts of the world. This trend will soon normalise ‘digital only banking’ and eventually ease traditional bank institutions in Sri Lanka too.

Banks are also increasingly looking to have meaningful conversations with customers in digital spaces. Technologies such as AI are helping banks to make human connections while machine learning now surpasses humans in some tasks.

Today, technology has its hand in almost every aspect of banking and its influence will continue to catapult the sector into a digitalised future.

Q: Could you outline the pressing challenges banks face today?
A: Inflation and rising interest rates will be the two most pressing issues that customers and bankers will encounter.

The higher rates that prevail today make borrowing costlier and less appealing. It’s believed that higher interest rates help stamp out inflation but that’s essentially an article of faith based on the long held economic gospel of supply and demand.

On the other hand, inflation can also undermine borrowers’ debt servicing capacity by reducing their real incomes – especially when wages are stagnant.

When loans have variable rates, inflation can reduce the debt servicing capacity of borrowers. This is because lenders will always adjust their rates to maintain real income levels and take on the burden of the increase in policy rates, which occurs when monetary authorities take action to combat inflation.

So even though banks are far better capitalised than they were during the global financial crisis of 2007/08, they need to be even more confident about their non-performing loan portfolios. Risk officers should be stress testing their lending portfolios regularly, given the current level of volatility and dynamic changes to government policy.

This is an area that can really benefit from artificial intelligence since it will be able to help banks to model complex and developing scenarios with many variables.

Q: What are the most significant aspects that banks should be mindful of, given the prevailing situation?
A: Managing liquidity risks will be the most challenging function for all commercial banks.

The pandemic has hampered economic activity around the world; and in Sri Lanka too, entire sectors have been dormant for months.

As businesses dig into reserves and seek sources of funding to keep their doors open, access to liquidity will continue to tighten.

Meanwhile, the possibility of declining credit quality across the board, mostly visible in the retail sector, will exacerbate banks’ liquidity buffers.

Basel III post-credit crisis regulatory measures – such as the introduction of the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), combined with the central bank’s ongoing quantitative easing activities – will make liquidity management tougher for banks in the future.

To ensure that liquidity management is effective, it’s imperative that financial services institutions have a consolidated view of their sources of risk.

This includes fast and efficient access to clear, accurate and consistent data across multiple business lines, as well as the introduction of stress testing methodologies and processes to measure responses to liquidity scenarios.

Q: In your opinion, how should Sri Lankan banks improve?
A: Sri Lankan banks should be innovative and introduce product solutions without being conventional.

The psychographics of Sri Lankan consumers are transforming with the emergence of the new middle class, millennials and gen Z, and forcing banks to continuously innovate their financial propositions using digitalisation, AI and big data.

Apart from product innovation, customer centricity and service excellence are also essential ingredients for banks, in order to be successful and create value.

Many banks are committed to taking their banking business to the next level while maintaining strong but sustainable performance.

These efforts are regularly recognised at the National Business Excellence Awards organised by the National Chamber of Commerce of Sri Lanka (NCCSL) where local banks receive awards for the banking sector and even merit awards in the corporate governance category.

In addition, some banks are also ranked by LMD as being among the ‘Most Awarded’ entities in Sri Lanka.

Finally, truly Sri Lankan banks are focussed on promoting financial security and fulfilling the aspirations of their customers while underwriting the prosperity of the nation.

The interviewee is the Deputy General Manager – Treasury of Pan Asia Bank