Compiled by Yamini Sequeira
FUNDING THE FINTECH AGE
Laksanda Gunawardena assesses the tech evolution of financial institutions
Q: How do you view the performance of non-banking financial institutions (NBFIs) in financial year 2018/19?
A: Overall, performance of the NBFI sector slowed considerably in 2018 due to low credit growth, declining profitability and increasing non-performing loans (NPLs).
The lending growth contraction in the sector is attributed to a slump in loan to value (LTV) ratios for selected vehicles with the aim of reducing imports into the country.
Tax revisions on motor vehicle imports and a marginal depreciation of the Sri Lankan Rupee against the US Dollar also contributed to a drop in new vehicle registrations. The LTV restriction has put a dampener on the importation of motor vehicles.
Q: And what were the main challenges to growth during the year?
A: Rising NPLs, intense competition from both banks and finance companies, and rapidly changing regulatory and compliance requirements were the major challenges faced by the sector, along with technology growth and competition from fintechs.
Access to concessionary funding lines – confined only to banks – makes it a non-level playing field for NBFIs.
Q: How would you describe the present status of the sector?
A: A fallout of the LTV rule is that it made leasing a bankable business for banking institutions, which entered the fray enthusiastically since LTV ratios rendered leasing a less risky proposition.
The LTV direction, which could have improved the quality of credit in the sector, has boomeranged as banks moved in to capture this lower risk element of the market by offering attractive interest rates.
In the absence of a level playing field between the banking and non-banking sector, NBFIs have been forced to move into more risky territory to survive, forgetting their cash cow – vehicle leasing.
Q: What are the challenges faced by SMEs in this environment?
A: SMEs account for more than 75 percent of the total number of enterprises in this country, provide 45 percent of employment and account for 52 percent of the nation’s GDP. Access to finance, skills development, high business costs, market exposure and low profit margins due to intense competition, and slower adaptation to e-commerce, are some of the challenges faced by our SMEs.
To make financial systems more accessible and inclusive at the grassroots level, policy makers’ intervention to cut red tape, and improve productivity and access to finance with a global perspective, is paramount.
Q: Are there new trends in the sector?
A: Rapid development of financial technology, electronic payments and funds transfer systems have emerged as the twin pillars of modern development. Products provided by NBFIs have moved beyond conventional service offerings and customers have access to services around the clock.
NBFIs require alternative delivery channels through partnerships with fintech. This has helped improve efficiencies, reduce transaction costs and promote financial inclusion.
Fintechs have technological solutions while NBFIs have the customer base. Bringing the two together generates new market opportunities for SMEs as a win-win strategy. A notable shift in business models away from vehicle financing and towards pawning, other loans, microfinance and factoring was witnessed in the recent past.
Indeed, business models continue to evolve.
Q: What measures should be taken to resuscitate NBFIs?
A: The NBFI sector is the cradle of entrepreneurs and the economic rebuilding process. For the sector to grow and contribute to the economic development of the country, there’s a need for political stability and policy consistency.
This will facilitate direct investment in large projects since Sri Lanka does not have sufficient savings to fund its own infrastructure programmes.
Although road connectivity has improved over the last few years, economic growth needs to filter down to rural areas.
And there is much to do in terms of improving infrastructure, road networks and power generation. Tourism has the potential to be a game changer and thus requires further investment.
The NBFI sector is vulnerable to policy instability and interest rate volatility. There is a surfeit of players in the sector; however, the Central Bank of Sri Lanka has tightened regulation and challenged these entities with much higher minimum capital requirements. This will lead to mergers and consolidations, and an eventual rationalisation of numbers.
Most often, ‘unbankable’ rural entrepreneurs face higher credit costs as NBFIs primarily depend on deposit funding. Considering the specialised knowledge of assessing SMEs and grassroots level entrepreneurs, accessibility of concessionary funding lines for NBFI operators has assumed greater importance.
A model that distinguishes banking and financing business needs to be drawn up, with the assistance of the regulator and major stakeholders.
This is because vehicle financing is no longer a sustainable business proposition for the NBFI sector.
Sector consolidation and distinguishing core areas of concentration is the way forward, as opposed to banks and NBFIs competing for a slice of the same pie, which makes the latter more vulnerable.