Compiled by Yamini Sequeira

TIME TO WEATHER THE STORM

Tamani Dias pays tribute to the resilience of Sri Lanka’s banking sector

Q: How has the banking sector weathered the twin shocks of the pandemic and an ongoing economic crisis?

A: The banking sector remained resilient through the pandemic due to its solid capital base and strong support from the Central Bank of Sri Lanka. However, the subsequent economic crisis continues to be a significant challenge.

A shrinking of the economy is especially difficult for the SME and MME segments. It’s adding stress on the profitability, liquidity and capital base of banks. As such, a critical need is to ensure completion of the IMF agreement at the earliest.

Q: What are some worrisome impacts of the economic crisis on the sector? And how is your customer base of exporters handling the situation?

A: A primary worry resulting from the economic crisis is an increase in non-performing assets, which will stress the capital and liquidity of banks. Therefore, supporting clients through this crisis and ensuring minimal impact on bank books will remain critical to weathering the storm.

Despite these challenges, the government and Central Bank have worked together to ensure that the export sector is supported. As a result, we see exporters’ businesses continuing with minimal disruption.

As dollar earning enterprises, they remain fairly insulated from the country’s primary challenge of inadequate foreign exchange. They have also been supported by the depreciation of our currency, which has enabled these export companies to remain competitive and secure orders despite the softening we see in global demand.

Q: How are higher interest rates impacting banks?

A: Higher interest rates have dampened credit growth with private sector credit growing at 1.9 percent in August compared to a high of 10.2 percent in March. This is a stress on asset growth and profitability.

Additionally, higher interest rates are also a major challenge to the SME and MME segments as they’re unable to factor this cost into their business operations. This is why non- performing loans (NPLs) are increasing, and it’s a cause for concern in terms of profitability and capital adequacy.

Q: As for the capacity of raising debt capital by local banks in overseas markets, how has this been affected by credit ratings being lowered?

A: The country rating of ‘restricted/selective default’ will continue to be a roadblock for Sri Lankan banks that are trying to access global debt markets – such as the international bond market.

At lower volumes however, local banks will be able to raise debt capital from development finance companies or multilateral organisations as they provide funding for specific development needs of the economy.

Q: How is the forex crisis impacting local and foreign banks? What are the pitfalls that lie ahead if the lack of dollars in the system continues?

A: Our decision to prioritise key imports such as energy, food and pharmaceuticals – while continuing to support key domestic manufacturers in the import of critical raw materials to ensure factories were sustained – substantially reduced our forex requirement and helped meet foreign currency payments in a timely manner.

This will be seen across the market where it’ll remain critical to shrink the economy by primarily curtailing nonessentials so that the banking sector can manage its own flows. Meanwhile, the government in parallel should work on increasing worker remittances and tourism receipts.

Q: What are the challenges faced by banks due to the forex crisis?

A: During the early days and weeks of the forex crisis, many essential payments were inordinately delayed, and this put considerable stress on our clients in terms of their daily operations and relationships with suppliers.

With a conscious decision to provide only what is critical however, we managed to ensure that customers’ foreign currency payments remain supported in a timely manner.

Q: In what ways are foreign banks evaluating the present scenario – and how worried are their headquarters about Sri Lanka’s economy?

A: The primary challenge for a foreign bank is that the cost of doing business in Sri Lanka has increased substantially. As the sovereign credit rating is at a restricted/selective default, the impact is on credit ratings of corporates, which are typically benchmarked to their sovereign.

Despite corporate performances being strong therefore, such a rating is not reflective of this and the capital allocation for extending balance sheets to these corporates has increased.

This also means that expected credit losses booked against each corporate exposure have also increased substantially, which impacts our overall profitability and capital adequacy.

Q: And last but not least, what new trends or customer behaviour are you seeing as a result of the economic crisis?

A: There have been some positive outcomes. We have seen corporates rethinking their operations and becoming more productive. Corporates that were comfortable in the domestic market are now stepping into export markets with considerable success.

These are notable moves to improve foreign exchange flows to the country – even in the future.

The interviewee is an Executive Director and
the Head of Local and International Corporates
of Standard Chartered Sri Lanka.