LMD takes stock of the banking sector in relation to COVID-19 and the outlook for the year ahead

Sri Lanka’s banking sector – comprising licensed commercial banks and licensed specialised banks – dominates the country’s financial system and represents the lion’s share of assets in the financial system. Indeed, the banking community plays a crucial role by providing liquidity to the economy and transforming the risk characteristics of assets in the financial system.

Furthermore, banks provide payment services and thereby facilitate businesses to conduct their financial transactions. But at the same time, they’re susceptible to creating vulnerabilities of a systemic nature, stemming from mismatches in the maturity of assets and liabilities, and the interconnectedness therein.

In this context, banking integrity and solidity are a sine qua non to preserving confidence in the financial system. On the other hand, any failure in this regard could potentially impact the activities of other entities both financial and nonfinancial, as well as the economy as a whole.

Central Bank of Sri Lanka (CBSL) data reveals that the banking sector continued to expand at a slower pace in 2019 compared to the previous year “while exhibiting resilience amidst a challenging business environment.”

CBSL also notes: “The banking sector dominated the financial sector accounting for 62.1 percent of total assets in the financial system at end 2019. Credit growth of the banking sector, which moderated during the first half of the year largely due to the lack of demand for credit, displayed signs of recovery towards the second half of 2019.”

“Deposits continued to be the dominant source of financing for the sector while a decline in borrowings was observed during the year. The banking sector profitability declined compared to the previous year due to deteriorating asset quality, rise in operating costs and increase in taxes. However, the banking system maintained capital and liquidity well above the regulatory minimum requirements, demonstrating the resilience of the sector,” the Central Bank adds.

The role of banks became all the more significant with the onset of the COVID-19 pandemic earlier this year.

Having identified the importance of reviving businesses that were adversely affected by the coronavirus crisis to mitigate the drastically hampered lifestyles of citizens and an economy under serious threat, CBSL – under the instructions of the Government of Sri Lanka – introduced the Saubagya COVID-19 Renaissance Facility with licensed banks acting as the participating financial institutions of this initiative.

Nevertheless, a report published by Fitch Ratings in June cautioned that Sri Lankan banks’ operating environment and financial profiles faced escalating risks from the economic fallout of the coronavirus.

The rating agency also observed that “the weakened operating environment will compound the existing threat to the banks’ financial profiles through elevated asset quality and earnings pressure although the sector’s adequate capital buffers should help it withstand the near term risks.”

Fitch anticipated rated banks’ core earnings metric of operating profit to risk weighted assets to fall to 2.7 percent by the end of this year from a low of 3.1 percent at end-2019 while adding that “most of the banks have sufficient pre-impairment profit… buffers to absorb increased credit costs without incurring losses.”

It is against this backdrop that LMD sought the views of leaders from across Sri Lanka’s banking arena: we asked them to assess the state of the banking sector in the light of the COVID-19 crisis along with their insights into what may lie ahead.

FOOTNOTE The bank heads featured in this Cover Story are those who responded to our request to participate in it.

Jonathan Alles

Managing Director/CEO
Hatton National Bank 

Q: How would you assess Sri Lanka’s COVID-19 relief allocation compared to regional peers?

A: Sri Lanka occupies a unique position in the world regarding its response to COVID-19. On the economic front, the Central Bank of Sri Lanka (CBSL) was quick to implement a relief scheme with the support of the banking sector particularly focussing on SMEs. This included moratoriums that have been extended up to March 2021 for the tourism industry.

In addition, CBSL initiated a Rs. 150 billion relief package to provide working capital financing while auth­­o­­­­­­­rities offered deferment of tax pay­ments. Similar measures have been adopted by regional peers.

More developed nations have pro­vided support by way of grants and interest free loans.

However, the present situation in our country does not permit this. Therefore, the support offered by CBSL and the banking sector to revive the economy is commendable.

Q: What changes will enable banks to stay relevant in the ‘new normal’?

A: The world was not ready for a pandemic of this nature and magnitude. Nevertheless, early adopters of digi­tisation have been more successful in carrying out operations despite restrictions.

For banks, digitisation is key to staying relevant and future proof. It is critical to understand the opportunities arising within the changing business environment through innovative solu­tions.

To foster an innovative culture, we must have flatter structures, and agile teams that are digital savvy and change oriented. Given the uncertain times, flexible arrangements – viz. working from home (WFH) – and processes that support efficient operations are important.

Q: Is the government extending sufficient fiscal and credit risk support to banks?

A: As the lifeline of the economy, it is important that the health of the banking system is given due consideration to ensure its strength and stability to support customers – especially ailing industries.

While credit risk remains with banks under refinance schemes, and affects long-term profitability and shareholder returns, the credit guarantee scheme is a step in the right direction. We anticipate further initiatives to support SMEs and the possible creation of a development bank.

On the fiscal front, the banking sector was taxed close to 60 percent last year. However, tax reforms since December 2019, and the removal of the Nation Building Tax (NBT) and debt repayment levy, are welcome moves.

Sri Lanka has immense potential in many sectors such as agriculture and manufacturing. It must continue promoting entrepreneurship at the grassroots and SME levels, to drive local production and reduce imports.

Within the right framework, these entrepreneurs could eventually grow to become exporters.

Therefore, it is essential that the government develops a clear plan to revive these sectors to rebuild our nation.

Vikas  Arora

Chief Country Officer – Sri Lanka
Deutsche Bank

Q: What business changes do you foresee for the banking sector? And what can banks do to stay relevant and future proof?

A: The COVID-19 health crisis has accelerated the digitisation of banking services; it is no longer optional for banks – it is a must. Traditional banks will need to continue being innovative if they want to stay relevant and work together with fintechs as the role of banks evolves.

In Sri Lanka, much like in many other developing countries, there has been increased momentum and adoption of digital channels, with the Central Bank providing its support to this initiative and having declared 2020 the ‘Year of Digital Transactions.’

Q: How can the sector cultivate renewed trust in anticipation of a global economic downturn?

A: Clients need the support of their banking partners more than ever in times of downturns. This is how we build long-term relationships with clients and maintain their trust.

Some corporate clients in particular have been impacted by the pandemic with trade slowing down, thereby affecting earnings. In these times, we ensure to stay close to clients and find ways to meet their changing needs. Many clients have thanked us for having gone out of our way to facilitate transactions for them during the peak of the crisis and curfew.

Q: In terms of staffing and operations, what measures can the sector take to evolve and be lean using the lessons learned from recent events?

A: The pandemic has placed at the forefront the adoption of technology when it comes to remote working and communication with clients. While it cannot replace face-to-face interaction and its benefits, one could expect that this trend is here to stay.

It also highlights the importance of having robust systems and operations to be able to continue servicing clients seamlessly.

Q: How do you view the severity of the COVID-19 instigated economic downturn across the world?

A: The full extent of the economic impact of COVID-19 is still unknown; but it’s clear that the recovery will be long-drawn-out.

Obviously, the severity will vary across different sectors depending on business models – for example, travel and tourism may take several years to recover while corporate travel may never be the same again. Similarly, apparel exports from Sri Lanka will witness a slow recovery as demand may change.

In addition, there have been several debt moratoriums granted by banks across the world and as these begin to fall due over the next quarter, one would expect non-performing loans (NPLs) to rise across the sector.

Mohamed Azmeer

Chief Executive Officer
Amãna Bank

Q: What changes in business do you foresee for the banking sector as a whole?

A: Existing business models are being challenged worldwide, and the sector has been forced to rethink how it approaches the businesses it serves and adapt to the present environment.

These challenges come with opportunities. During the pandemic, digital banking witnessed an unprecedented increase.

That the Central Bank of Sri Lanka (CBSL) had already declared 2020 as the ‘Year of Digital Transactions’ was a blessing, which enabled the banks to be at the forefront in service provision through online platforms. The leadership of D. Kumaratunge, Director Payments and Settlements of CBSL, enabled the sector to optimise its offerings.

Supporting customers during this period will ensure banks remain relevant.

Q: How can the sector cultivate renewed trust in the wake of a global economic downturn?

A: The need for the sector to demonstrate the support it can extend is extremely relevant. We extended many support measures including crediting customers who experienced delays in their salary credits by providing a bank funded salary advance free of charge.

Furthermore, our branches remained accessible during the curfew while also introducing ‘bank-on-wheels’ operations, cash delivery to senior citizens with restricted mobility, waiving of charges on internet banking fund transfers, and enabling convenient digital service onboarding through our contact centre and website.

Based on the direction of the government and CBSL, we extended special relief moratoriums to cover nearly 47 percent of the advance portfolio and supported the Saubagya COVID-19 Renaissance Facility. We supported this scheme by processing and disbursing over Rs. 500 million in working capital for SMEs.

Q: What measures can the banks take to evolve using the lessons learned from recent events?

A: A short-term challenge such as the curfew period shouldn’t have instantaneously triggered pay and benefit cuts as much as it did in some instances.

This is the time for organisations to stand by their staff and help them maintain their livelihoods in gratitude for the many years of service and profits they granted the organisation. Doing so will develop a passionately engaged workforce, which will help unearth hidden corners of wastage and other avenues of reducing costs for the organisation, including staff redeployments and optimisation.

Q: How do you view the severity of the global COVID-19 instigated downturn?

A: Organisations must develop plans to ensure business continuity in the face of unforeseen challenges. While COVID-19 has brought challenges, the subsequent opportunities cannot be ignored.

It’s time for every country to revisit its economic policies, and optimise re­so­­urces and capabilities. The government is taking bold steps in the right direction with appropriate policies to support local business.

Ravin Basnayake

Managing Director/Citi Country Officer

Q: How would you assess Sri Lanka’s COVID-19 relief allocation compared to other nations in the region?

A: We must put this into the context of the fiscal space available to the government. In the light of this, the government has done well – immediate relief was rendered. Whether this was sufficient or not has been subject to debate but the timely provision of relief was instrumental in helping people manage during the curfew.

In the corporate sector, most of the assistance was channelled through the banking sector by way of concessionary interest rates, loans and incremental loan schemes. What was important is how targeted the programmes were rather than being broad – and this was smartly executed.

Q: Is the government extending sufficient fiscal and credit risk support to banks?

A: The government and banking sector underwent various programme amendments that were originally implemented, and learned from mistakes.

For example, the Central Bank of Sri Lanka (CBSL) identified that one reason for delays in relief reaching end recipients was the lack of credit guarantees. This was subsequently addressed through a CBSL credit guarantee scheme.

It also reduced the Statutory Reserve Ratio (SRR) by 300 basis points and policy interest rates by about 250 basis points, and changed certain regulations relating to liquidity. This increased market liquidity, facilitating banks to support impacted industries without too much stress.

Q: How feasible is a credit guarantee scheme where the risk is shared between the government, lending institutions and development finance institutions?

A: A credit guarantee scheme is essential in the present context where most programmes flow through the banking sector to ensure necessary support is provided to impacted industries while maintaining banking sector stability.

The Central Bank has provided a credit guarantee scheme under the Saubagya programme, which has worked well so far.

Q: What is your take on the severity of the global economic downturn following the COVID-19 crisis?

A: An eight percent contraction of the global economy is projected and the impact would be widespread. There could be permeant changes such as alterations to supply chains and labour markets. Migratory labour flows have suffered and this is crucial for countries such as Sri Lanka.

Furthermore, per capita incomes worldwide have reduced, driven by unemployment. It is believed that some of the progress made in reducing global poverty over the last decade could be reversed due to this crisis.

It is too early to say if we will witness a ‘V’ or ‘W’ shape recovery. This would depend on many factors including how well countries manage the pandemic, the strength of local economies, speed of recovery of key export markets and availability of a vaccine.

Nanda Fernando

Managing Director
Sampath Bank

Q: In terms of staffing and operations, what lessons have banks learnt to evolve with?

A: Sampath Bank managed to continue operations during the COVID-19 induced curfew. This was because infrastructure was already in place to run effective disaster recovery centres (DRC) and work from home (WFH).

Given the nature of the present banking business, it is not easy to have WFH or hotdesking at the moment. But the use of conferencing online has become a real hit and such good practices will definitely continue.

In addition to these measures, the banking sector has identified many areas that can be automated or digitised, to simplify operations and release staff. These projects are being implemented at present.

Q: What changes to business models and operations do you foresee for banking as a whole? And what can be done to stay relevant and future proof given the implications of the ‘new normal’?

A: While the basic functions of banking – i.e. lending and deposit taking – will remain the same, everything else – including modes, means and operations – will change considerably in the coming years.

This is due to the digital age, as well as new generations that operate and think differently, and have different needs. To stay relevant and future proof, banks will have to change to become technology companies that are engaged in offering banking services to the public.

Increasingly adopting new technologies and innovation to offer better banking services would be a need that we’d have to continue to cater to consistently.

Q: In your view, is the government extending sufficient fiscal and credit risk support to the banking community? If not, how can this be improved?

A: Presently, we believe that the government is extending sufficient fiscal and credit risk support to banks. However, private businesses need to take advantage of this and resume productive investments to drive economic growth.

Q: And finally, how do you view the severity of the impact of the COVID-19 induced economic downturn across the world?

A: Globally, COVID-19 continues to spread, and there are periodic openings and lockdowns of economic activity.

Therefore, it’s difficult to quantify the exact toll on the global economy going forward. However, it is evident that the downturn will be more severe than during the 2008/09 recession caused by the global financial crisis.

Palitha Gamage

HDFC Bank of Sri Lanka

Q: In your view, how has the banking sector responded to COVID-19 so far?

A: As directed by the government and police, those working in banks were able to use their bank IDs as curfew passes during the curfew. Therefore, it was not a situation that called for our business continuity plan (BCP) to be implemented in full.

Rather, we were able to conduct business with only critical team members reporting to work regularly while the rest of the team was able to work from home (WFH) and connect remotely. As time passed, we operated with a third of the workforce in the office.

Q: What were the sector’s priorities during the curfew?

A: The priority during this time was to facilitate cash withdrawals and crediting funds to accounts received through the Sri Lanka Interbank Payment System (SLIPS), which is an online interbank electronic fund transfer system.

Most often, salaries are credited through SLIPS; and these payments are received twice a day by the bank. Therefore, we ensured that customers received their funds on time so they would be able to withdraw their money with ease during the curfew.

Furthermore, we ensured that sufficient cash was available in our ATMs at all times while our branches were opened for customers as directed by the government. The bank set up a ‘COVID-19 Operations Team’ to oversee day-to-day activities, connected through a WhatsApp group for key team members to communicate and make decisions.

Q: And how do you view the role of the banks in the national economic recovery phase?

A: The banking sector’s main role was to provide liquidity during this time. It was noteworthy that all major banks came together during the curfew to ensure that customers had access to cash through mobile ATMs, bank branches and online accounts.

Another method of support was thr­o­ugh moratoriums as directed by the Central Bank of Sri Lanka. Over 23,000 applicants requested moratoriums through us by way of electronic registration facilities made available on the bank’s website.

Businesses facing difficulty can be divided into three categories.

First, those facing short-term difficulties for which banks could provide short-term credit.

Secondly, those facing more serious difficulties; these businesses must be handled carefully as they could either continue or be shut down – such clients need more assistance in terms of balance sheet restructuring and product rationalisation.

The third category relates to those whose businesses have suffered drastically and revival is unlikely. Perhaps the banks should foreclose on these and in turn, resell them to stronger and more capable entrepreneurs.

Sujeenie Gunasekera

Country Operations Head and Deputy General
Manager of a foreign bank in Sri Lanka

Q: In terms of staffing and operations, what measures can the banking sector take to evolve and be lean using the lessons learned from recent events?

A: COVID-19 challenged our notions of what constituted a ‘conventional workplace.’ The unprecedented curfew meant that we had to pivot our workplace ideologies and trust employees to stay productive despite working remotely.

The pace of change – particularly in the past few months – meant that we could not dwell on our biases on employee productivity.

It highlighted the trust deficit that often undermined previous attempts to make flexible working a reality. While technology and policy will need to keep pace with the demands of flexible work environments, we have reached an inflection point on how progressive organisations manage their human capital.

As we transition to a lean workplace model, our success will depend on how well we prioritise and invest in building high performing teams, invest in technology and address the ‘elephant in the room’ – i.e. trust.

Q: What changes in business do you foresee for the sector as a whole?

A: The crisis not only created challenges in the form of externalities for our organisation but also affected customers’ and employees’ lives. As an organisation, our priority during the initial stages of the curfew was to safeguard the health of customers and employees.

The sector also focussed on efforts to adapt swiftly to the ‘new normal’ to ensure that we remained operational as an essential service throughout the curfew. Our response to the pandemic demonstrates that we’re capable of change – and can leapfrog legacy barriers that have limited our ability to evolve operational models.

If organisations within the banking sector assess the externalities shaping our future, empower their organisations and teams with digital capabilities, and stay relevant to their customers’ needs, they will overcome uncertainty.

Q: How effective were business continuity plans (BCPs) and in what ways were they revised to face COVID-19?

A: The banking sector’s robust BCP was prepared to address the crisis and this was evident across the sector.

All banks undertake a BCP simulation at least once a year. Furthermore, the Central Bank of Sri Lanka’s policy guidance on disaster recovery and business continuity planning is of a high standard, and stood up to this litmus test exceptionally well.

Despite the disruptive nature of the health crisis, as an essential service the banking sector undertook clearing functions, treasury and necessary payments with minimal disruption.

While evidence suggests that the prevailing BCPs were reliable and useful, it would be prudent to review these plans so that we can incorporate lessons learned from this experience and strengthen areas, particularly around employee wellbeing and building resilience for future events.

Deshamanya Prof. W. D. Lakshman

Central Bank of Sri Lanka

Q: How do you assess Sri Lanka’s COVID-19 relief allocation compared to our peers in the region?

A: Sri Lanka is one of the few countries that have successfully curtailed the spread of COVID-19. A key difference in our relief measures is the fiscal constraints – the Central Bank of Sri Lanka (CBSL) played a lead role in providing financing to businesses and the government.

These timely relief measures – viz. debt moratoria, concessional loan schemes and easing of overall monetary conditions – helped lessen the economic impact of the pandemic with concessions granted by the government.

The timely relief is enabling Sri Lanka to return to normalcy and move beyond the recovery phase ahead of many other countries.

Q: And what is your take of the ‘Saubagya COVID-19 renaissance facility’ and its role in business revival?

A: We introduced this facility expecting to disburse concessional funds to businesses as working capital. By the end of August, a total sum of Rs. 120 billion had been approved by CBSL under this scheme, of which 82 billion rupees was disbursed by banks to 29,441 beneficiaries.

Of the total approved loans, 50 percent is for the services sector, and 34 percent and 16 percent for the industrial and agricultural sectors respectively. Saubagya is a flagship facility that’s aimed to help local businesses to recover fast from the COVID-19 impact.

Q: In your view, how feasible is a credit guarantee scheme with risk shared between the government and other lending institutions?

A: As seen in many other developmental states, well designed credit guarantee schemes with effectively balanced risk sharing can limit moral hazard problems and support the expansion of credit to needy sectors.

CBSL announced the present credit guarantee scheme under the Saubagya COVID-19 Renaissance Facility along with an interest subsidy mechanism to promote bank lending to domestic businesses.

Such schemes are essential for SMEs and new productive ventures to take off. Therefore, the Central Bank together with other government authorities expect to introduce a permanent mechanism to address this need soon.

Q: How can the present refinance schemes be made more accessible and SME friendly?

A: A major issue faced by small businesses in accessing bank credit is the lack of collateral. With refinance schemes, CBSL is able to address this to some extent.

We conduct islandwide awareness programmes for SMEs while urging banks to provide post-business revival credit facilities at low interest rates by considering potential cash flows of businesses.

Going forward, establishing credit guarantee and enterprise development banking initiatives, and stronger credit scoring mechanisms, will help create an SME friendly business environment.

Thilak Piyadigama

Chief Executive Officer
SDB bank

Q: In terms of staffing and operations, what measures can the sector take to evolve?

A: The bank has been experimenting with working from home (WFH) for some time.

Therefore, when the curfew was imposed, we were able to execute operations and WFH with a certain level of expertise and experience, as well as having technology in place to support these changes. It was an effective time for the bank and this practice is now in our DNA.

Going forward, the bank’s model will focus on continuing Zoom meetings and remote team calls instead of bringing staff to Colombo from branches in the outstations. Such changes will be incorporated in accordance with the new operating model we are implementing.

Moreover, the bank will formally introduce WFH including telecommuting, hotdesking and the like by means of a revised human resource (HR) policy.

Q: How can the present refinance schemes be made more accessible to SMEs?

A: Banks are unable to always provide finance to SMEs at very low interest rates because such funds are limited at the moment.

To make refinance schemes more accessible and SME friendly, the Central Bank of Sri Lanka can provide proper guidelines and allocate funds to banks that in turn can take on the responsibility of decision making with regard to disbursement.

At present, the Central Bank processes all applications, which prolongs the time taken to receive approvals. It’ll be more efficient if it provides guidelines to the banks so they can disburse funds to SMEs and manage the credit risk.

Q: What changes in business do you foresee in banking?

A: With financial services regulations being relaxed to promote economic revival, it is critical that state regulators and policy makers comply with the same revised standards when evaluating banks on compliance.

At present, there is a push for SME growth in the country. However, prior to embarking on this journey, SMEs must understand the business risks involved, be ready to operate in a professional manner – i.e. by ensuring they have adequate buyers, suppliers and a structured value chain – and practise good business skills and transparency, by means of bookkeeping, auditing and so on.

While at present such practices are lacking among most SMEs, the government must encourage them to professionalise to an extent that regulated entities such as banks are able to relax standards and take on the risk of providing financial assistance during this time.

Mark Prothero

Chief Executive Officer Sri Lanka and Maldives
Hongkong and Shanghai Banking Corporation

Q: Is the government extending sufficient fiscal and credit risk support to banks, in your view?

A: More so than fiscal and credit risk support to banks, the government – through the Central Bank of Sri Lanka’s Monetary Board – has adopted an accommodative monetary policy stance, providing enhanced levels of liquidity through the reduction of the Statutory Reserve Ratio by 300 basis points and cuts of 250 basis points in policy interest rates to support the economy.

Banks also witnessed the withdrawal of the Debt Repayment Levy earlier this year.

While it’s vital to provide concessions, authorities must be mindful of the pressure these necessary relief measures may have on banks at a time when expected credit losses are rising steeply and revenue opportunities erode.

Q: How feasible is a credit guarantee scheme where the risk is shared between the government, lending institutions and development finance institutions?

A: A credit guarantee scheme where underlying risk is shared is a feasible way to support businesses and has been successfully adopted globally.

Injecting liquidity and funding into the market is also important. However, given the deteriorating risk profiles of customers owing to the pandemic, banks may be reluctant to extend facilities where the risk is wholly underwritten by them from a risk appetite perspective.

Ideally, both liquidity support and credit guarantees included in a scheme will provide maximum benefit to customers.

We must consider how customers will transition off moratorium relief schemes – often, the cash flows of a business are insufficient to support any additional interest or capital repayments immediately after the completion of the moratorium period.

Q: And how do you view the severity of the downturn following the COVID-19 crisis?

A: We’re witnessing one of the most severe recessions in many decades. Outbreaks in parts of Asia that previously had the virus under control indicate that the world must stay vigilant.

Until the virus is broadly under control or there’s a widely available vaccine, it may prove difficult for economic activity to return to normal.

Q: What measures can the sector take to evolve based on recent events?

A: The curfew taught us a lot about more flexible working arrangements and the need to accelerate digital delivery of services. Although flexible working was encouraged, there was limited participation as the idea of working from home (WFH) was not widely accepted due to various misconceptions.

The pandemic has accelerated the notion that ‘work is what you do and not where you do it.’ It also enabled us to align our real estate portfolio to new ways of working, reimagine the purpose of the workplace and rethink the work-life balance whilst releasing a substantial portion of the cost tied to the real estate portfolio.

Sivakrishnarajah Renganathan

Managing Director/CEO
Commercial Bank of Ceylon

Q: In your assessment, what is the role of banking in a post-COVID economic recovery?

A: Being a financial intermediary, the banking sector has a major role to play in a post-pandemic economic recovery. Banks are at the forefront of economic revival with effecting moratoriums and assisting customers to obtain refinance loans introduced by the government.

Almost all banks have introduced special loan schemes to assist SMEs during these trying times. There are many process adjustments involved especially in credit evaluations and recovery efforts owing to the adverse effects of the pandemic.

Taking all these into account, the banking sector is doing a remarkable job towards the economic revival of Sri Lanka.

Q: In terms of staffing and operations, what measures can the banking sector take to evolve and be lean?

A: There was an overwhelming response towards digital services during the curfew period and it is encouraging to see that this trend is continuing in the ‘new normal’ as well.

However, being a market that is very reliant on physical interaction, operations have more or less returned to normal levels with necessary precautions being taken. Moreover, we are equipped to work remotely at short notice, and to operate branches and departments with minimum staff, having done so successfully during the curfew.

There are robust plans in place to face a situation of this nature if the need arises.

Q: How effective were existing business continuity plans (BCPs) to face the pandemic?

A: Commercial Bank was able to function during the entire duration of the curfew despite the challenges encountered. It is testament to the robustness of our BCPs.

A global pandemic of this magnitude teaches you many unique lessons such as to update, change and create new BCP measures, which the bank was swift to action.

Q: What is your assessment of the Saubagya COVID-19 Renaissance Facility and its role in propagating business revival?

A: The Saubagya COVID-19 Renaissance Facility is a well thought out scheme with an attractive interest rate; it was implemented in a timely manner and is a major boost to the economy. However, additional funding by private institutions was needed due to limited existing funds.

Commercial Bank launched two self-funded loan schemes to assist the micro and SME segments to revive their business operations. In addition, many banks have launched similar schemes – and this is encouraging to note as every effort is essential to reviving businesses by providing adequate funds.

Dimantha Seneviratne

National Development Bank

Q: What role should banking play in the national post-COVID economic recovery?

A: The pandemic caused extended lockdowns globally, bringing most economic sectors – except essential services – to a virtual standstill. With the closure of factories, ports, airports and other logistics, the interruption to global supply chains was enormous.

An economy’s efficiency and growth depends on how rapidly money moves from one economic activity to another, enabling the creation of wealth. This slowed to the trickle that we’re observing today.

Banks are at the heart of the economy – circulating money, mobilising deposits and creating credit. As such, banking plays a major role in economic rebuilding and along with the regulator, must increase the trickle to a torrent.

The regulator has taken steps to increase market liquidity by relaxing regulations related to capital and introducing a credit guarantee scheme. At present, the larger responsibility lies with banks to ensure that needy segments can access finance while safeguarding depositors’ funds.

Moreover, banks play an advisory role, helping customers to navigate this unprecedented crisis.

Most customers may not be equipped with the know-how or capability to manage businesses at this time so banks must help by offering access to online platforms and export markets, promoting leaner operations and other efficiency solutions.

Increasing social resilience especially among the underbanked and unbanked population should be a priority.

Q: Is the government extending sufficient fiscal and credit risk support to banks? And how can this be improved?

A: The government and regulator have managed the fiscal side of the fallout quite well by releasing sufficient liquidity into the market, and making funds available to the banking and non-bank financial sector.

Credit guarantee schemes could have emerged earlier so that banks would have been able to provide immediate relief to more deserving clients. This crisis is not going to resolve itself until well into 2021. These relief mechanisms should continue into 2021 or at least until the end of this year.

Q: How can existing refinance schemes be more accessible to SMEs?

A: While the intervention of the government and regulators was timely, these schemes were introduced in phases targeting different segments and sectors.

Therefore, the multitude of schemes is confusing customers as to what they’re eligible for. Limited allocations to financial institutions, and sectorial and geographic limitations, are some hurdles in making them widely available.

In addition, some require external consultants’ reports and certifications, and strict compliance with environmental and social laws. If these schemes can be consolidated with broad guidelines, there will be more transparency and understanding on the part of customers.

Lakshman Silva


Q: What is the role of banking in the national post-COVID economic recovery?

A: When considering financial services post the April 2019 Easter Sunday attacks, Sri Lanka has been through many unprecedented events.

If one delves deeper into the specifics, it is evident that Sri Lankan finance institutions have never experienced a situation quite like this – where clients are granted moratoriums or extended repayments for such extended periods over and beyond the norm, under guidance issued by the Central Bank of Sri Lanka.

At present, one of the more serious issues that banks and other financial institutions face is the deferment of capital and interest together. Therefore, the banking sector’s role at the moment is to ensure that all clients can resume business while we take steps to service their financial facilities on a long-term basis.

Q: And what changes in business do you foresee for the banking sector?

A: When reviewing bank ROI, one immediately notices that banks will be severely stretched over the next two to three months because large moratoriums have been granted.

Moreover, the deferment of interest recognition due to the methodology followed will lead to delays in recognising income while interest margins would contract in the next few months as a consequence of the caps imposed by the Central Bank. Therefore, interest margins are under severe stress at the moment within the banking sector.

We are hopeful that clients will make repayments after the moratorium. However, if the country does not perform in the manner expected, there will be severe stress on repayments for customers. These are some of the possible business challenges banks may face in the upcoming months.

With virtual wallets and many other novel digital tools entering the market, the banking sector has become more digitally savvy and banks are encouraged to explore technology on a broader scope. Such advancements will bolster the banking sector and improve margins.

Q: How can your bank make refinance schemes more accessible and SME friendly?

A: From its inception, we have been accustomed to refinancing credit lines especially for the SME segment. The bank has a separate specialised SME unit through which it deploys employees to the field to meet SME owners.

Through this firsthand interaction, we’re able to understand the real requirements of SMEs. Moreover, by speaking to SMEs, we can recognise their banking and financial needs, and curate facilities to assist them.

Bingumal Thewarathanthri

Chief Executive Officer – Sri Lanka
Standard Chartered Bank

Q: How do you view the regional COVID-19 relief allocation?

A: Regional governments provided numerous forms of fiscal, monetary and macro-financial assistance to mitigate the pandemic. The priority has been to ensure availability of adequate market liquidity while minimising the impact on affected individuals and businesses.

Countries such as India, Nepal and Bangladesh have provided liquidity to their financial systems by reducing reserve ratios and removing capital buffer requirements. Financial assistance has been provided to low income earners while cheaper funding and deferred loan repayments were made available for those impacted.

Q: Is the government extending sufficient fiscal and credit risk support to banks?

A: The Central Bank of Sri Lanka (CBSL) took several measures to support financial institutions – the statutory reserve ratio of commercial banks was reduced to two percent from last year’s requirement of five percent; liquidity coverage and net stable funding ratios were reduced to 90 percent; and the interest rate on CBSL advances to banks was lowered by 650 basis points.

Moreover, the debt repayment moratorium including a six month moratorium on bank loans for impacted sectors and SMEs whereby CBSL is providing refinancing and concessional lending facilities is partially supported by a Central Bank guarantee.

Q: Would a credit guarantee scheme where risk is shared between the gover­­n­­ment, lending institutions and development finance institutions be feasible?

A: Credit guarantee schemes provide guarantees to groups that don’t have access to credit by covering a share of the default risk of a loan. In case of default, the lender is able to recover the value of the guarantee.

Almost all credit schemes introduced by the Central Bank put the risk of default on the lender. This gives rise to banks lending only to those who meet credit worthiness standards, making funding unavailable to a majority of affected businesses.

A partial or full credit guarantee will encourage financial institutions to lend more to those requiring financing during the pandemic.

Q: How do you view the severity of the COVID-19 induced global downturn?

A: We suspect the global economy will contract by over five percent, potentially aggravated by winter conditions, waves of new infections or a mutation of the virus.

An optimistic view is that the world economy will only contract by 1.6 percent with most jobs and industries recovering quickly, supported by highly accommodative policies and government subsidies with limited disruptions to economic activity.

More developed economies may shr­i­nk by over six percent, along with emerging and developing markets by 2.5 percent due to domestic demand and supply, trade and finance being impacted severely.

While the impact of the pandemic will vary, the largest is foreseen in emerging economies where the pandemic has severely spread, and there’s heavy dependence on tourism and export related trade.

Nimal Tillekeratne

Pan Asia Banking Corporation

Q: What is your take of the success of refinance schemes for SMEs?

A: Government refinance schemes must be restructured as a majority of these finances are being enjoyed by high-level SMEs that aren’t facing serious problems due to the pandemic compared to low and mid-level SMEs that are in dire straits.

If the government desires to have a presence at the grassroots level, it is imperative that these refinance schemes are directed at deserving SMEs.

Moreover, the success of these funds in revitalising SMEs will depend on how they are utilised by recipients. Many of these businesses were experiencing problems irrespective of the economic turmoil of the previous year and this year, due to mismanagement of funds, poor financial planning and extravagant expenses.

Therefore, banks are cautious about refinance schemes and their effectiveness when considering the bigger picture.

Q: How do you view the effectiveness of business continuity plans (BCPs) – and in what ways were they revised to face COVID-19?

A: The curfew imposed for several months since the end of March had a major impact on the banking sector’s regular business operations as customer interactions were curtailed to cope with the situation.

Banks continued their operations during curfew and provided uninterrupted services to customers. Limited numbers of staff were engaged in critical day-to-day functions on a need basis – subject to the necessary health and safety precautions – while the remainder worked remotely from their homes.

Most banks introduced mobile banking facilities to meet the requirements of the general public during the curfew. Furthermore, customers were able to carry out transactions through online banking portals while call centres were accessible to provide timely assistance.

Q: How can the sector cultivate renewed trust in anticipation of a global economic downturn?

A: The economic fallout of the COVID-19 pandemic has disrupted the global balance. No person or business – including banks – remains untouched.

A substantial share of SME loans remain under payment holidays (moratoriums) and banks must take proactive measures to mitigate the damage during the post-moratorium era – or else, higher credit losses are inevitable. Slow long-term economic growth and a muted world recovery will continue to impact the repayment ability of borrowers such as SMEs.

Relief measures introduced by the Sri Lankan government to customers may smoothen borrower cash flows in the short term. However, the banking sector will continue to be impacted by low loan collections in the near term, requiring maintenance of excess liquidity buffers to ensure public trust is renewed in the sector.

Furthermore, the sector must find or diversify into new revenue sources and engage in cost saving measures, thereby ensuring that investor confidence is maintained despite the pandemic.