BANKING SECTOR
Compiled by Tamara Rebeira
TIME TO TAKE THE LONG VIEW
Jegan Durairatnam focusses on what it takes to maintain trust and stability+
Q: How do you see declining interest rates impacting banks’ profitability and lending strategies?
A: When assessing interest rates, bankers weigh positives and potential risks. A drop in interest rates impacts profits initially but it also opens opportunities for increased lending, attracting new customers and reviving stalled projects.
The key is to focus on volumes rather than margins. Lower rates can boost business and help develop future clients, maintaining a positive outlook even amid interest rate reductions.
However, we must also consider the potential risks if the monetary environment shifts.
Lending to businesses that are only viable at low rates calls for caution. We evaluate whether these organisations can survive if interest rates rise even slightly, given market instability. It’s crucial to ensure that they can thrive in varying conditions without reverting to the extremes of recent years.
Presently, the low interest rate environment presents opportunities to onboard new businesses and restructure troubled loans. Companies that previously struggled with high interest rates are finding relief and stability.
This period allows us to address non-performing assets and provide necessary cash flows, positioning banks advantageously for the future even if rates increase.
Q: What is your take on the banking sector’s stability?
A: The banking sector has shown remarkable stability, particularly during the recent crises.
Despite challenges, banks met all debt obligations including bilateral and overseas debts though some required extra time. This resilience earned the trust of foreign lenders who recognise the sector’s steadfastness during tough times.
This stability is largely due to strict regulatory oversight and banks’ inherently conservative nature. Regulatory frameworks ensure compliance with swift corrections for any deviations. Additionally, well developed risk management departments within banks help avoid unnecessary risks, further strengthening stability.
Investor confidence remains strong, as evidenced by the over-subscription of rights issues and debentures even in a challenging economic environment where the government has occasionally fallen short of its financial commitments.
Banks remain well capitalised, reinforcing their stability.
Debentures and other financial instruments continue to perform well, indicating that investors and the banking sector anticipate minimal changes in economic policies post-election, enabling operations to continue confidently.
The private sector remains a vital partner for the banking sector especially as the state portfolio diminished in significance, following the government’s failure to meet its obligations to banks.
Q: How should banks adapt business models to navigate the evolving economic landscape and emerging opportunities?
A: There are two key perspectives to consider. First, there’s little differentiation among banks in Sri Lanka – most offer the same products and services, and any innovation is quickly replicated.
True differentiation lies in customer centricity and digital transformation. A customer focus is crucial for growth while digital transformation, despite challenges like cybersecurity and costs, is essential.
Beyond this, banks must explore new business streams such as green, and environmental, social and governance (ESG) initiatives. Green bonds for example, help corporates meet environmental goals and support sustainable projects.
Although currently priced like other financial products, green bonds educate the market on the importance of dedicated funding for sustainability. As green initiatives become essential over time, their value will be better recognised.
To remain relevant, banks must prioritise customer centricity, embrace digital transformation and venture into socially relevant areas like green finance.
Q: In what ways can banks leverage technology and innovation, to improve operational efficiency and customer experience?
A: Digitalisation in banking offers clear benefits – viz. cost reduction, operational efficiency and ease of use.
However, its real value lies in expanding access to customers who previously didn’t bank and engaging youth who prefer digital interactions.
These advancements enable banks to reach new customer segments – particularly those who are uninterested in traditional banking methods.
Digitalisation also comes with significant challenges including high costs and cybersecurity risks. Managing these vulnerabilities is critical so banks invest heavily in cybersecurity.
Banks face three primary challenges in digitalisation: high costs, security vulnerabilities and choosing the right technology.
With technology advancing rapidly, investing in solutions that may soon become outdated is risky. Therefore, banks must carefully evaluate technologies for stability and long-term relevance, to maintain trust and stability, even if it means being slightly behind the innovation curve.
Q: What are some of the main challenges facing the banking sector today?
A: Internally, staying ahead of the digital curve is crucial for enhancing the customer experience and maintaining competitiveness.
However, this requires careful decision making due to the substantial costs involved and the volatile economic environment we operate in. Interest rates, digitalisation and customer sentiment are key focus areas, as we must ensure that today’s strategies remain viable in an unpredictable future.
Externally, exchange rate volatility is a major concern. Unlike interest rates, which have shown some stability, exchange rates can quickly destabilise, affecting both banks and customers.
Managing the impact of these fluctuations is critical especially for customers who are vulnerable to exchange rate movements.
Geopolitical tensions also play a growing role, particularly as we shift towards an export driven market and rely heavily on remittances. Any disruptions in these areas can greatly impact our operations.
