BANKING ROAD MAP
Compiled by Yamini Sequeira
HAMSTRUNG BY SLOW GROWTH
Kapila Ariyaratne explains why the banking sector is facing serious challenges
The banking sector expanded last year, demonstrating its resilience by maintaining capital and liquidity above the regulatory minimum despite challenging global and local conditions. Excluding the Central Bank of Sri Lanka, it accounted for in excess of 62 percent of the total assets of the financial sector at the end of 2018.
Deposits remained the dominant source of funding in the banking sector while a declining trend in borrowings as a source of funds was reversed, according to the Central Bank. It reports that profitability of the banking sector weakened compared to the previous year as a result of a deterioration in asset quality, rising operating costs and higher taxes.
GROUND CONDITIONS Kapila Ariyaratne explains that “the banking sector is undergoing a relatively difficult period because customers across most sectors are facing challenges due to the slow pace of economic growth. Their hardship is evidenced by rising non-performing loans (NPLs), which are among the highest in recent times.”
“In addition to more favourable economic conditions and business growth, greater investment and a general improvement in operating conditions are needed to lower NPLs. Furthermore, banks need to comply with more stringent regulatory requirements stemming from Basel III and SLFRS 9 accounting standards, which are now in operation,” he elaborates.
Ariyaratne adds that “there is pressure on banks to meet higher mandatory capital requirements that have been brought into play by the regulator while fulfilling more stringent provisioning requirements. Combined with pressure on asset quality and low profitability, new taxation levels make it all the more difficult for banks to reach the mandatory capital limit.”
According to him, “banks are paying around 55 percent of [their] profits to state coffers. This is a substantial contribution. Notwithstanding these challenges, the sector has remained resilient while shareholders have remained committed to infusing the necessary investments to ensure that the sector remains strong – and on course to serve the economy and customers.”
The banker also avers that a lowering of the sovereign rating impacted the banks’ ability to raise capital overseas. Commenting further on the banking sector, Ariyaratne notes that by and large, state banks enjoy a monopoly over government business and account for some 60 percent of the market. Therefore, he calls for a more level playing field in the banking sector.
TREADING CAUTIOUSLY Ariyaratne believes that an upheaval in the microfinance sector was created due to aggressive lending but that better regulation, combined with educating consumers and improving their financial literacy, would help.
“Over-indebtedness is a problem at present when business loans are used for consumption. Financial literacy will help customers understand that using loans to generate business is more beneficial in the long run,” he asserts while stressing that notwithstanding some aberrations, the microfinance sector is making a vital contribution to uplifting communities in a sustainable manner.
He adds: “Although loan growth is being tightly monitored due to unfavourable conditions, we are handholding customers to help them recover faster as it is an obligation and in our mutual interest as well. Needless to say, we’re fully aware of how important it is for banks to work closely with customers in difficult times – and we remain fully committed to this cause.”
The credit card segment has displayed some growth and banks have had to tighten the quality of underwriting to counter a deterioration in portfolio quality in what is a further reflection of the impact of a lacklustre economy, Ariyaratne posits. He sets store by the resilience of banks, and reports that working closely with regulators has benefitted and strengthened the sector.
“There are challenges that will arise and need to be overcome. However, we must ensure that skills are retained and there is no brain drain,” he concedes. Meanwhile, Fitch Ratings notes that Sri Lanka’s small and medium-size banks are under the greatest pressure due to increased vulnerability to higher loan impairments.
BANKING TECHNOLOGY The increasing public use of mobile electronic devices such as smartphones has created an enabling platform, thereby widening the avenues for cashless transactions including e-banking and e-wallets.
Although mobile phone penetration in Sri Lanka stood at around 150 percent in 2018, mobile based payments (as a share of total retail payments) were minute in comparison with other countries.
In terms of returns, technology is a long-term investment to build digital infrastructure that is essential because change is coming and we must adopt or perish, Ariyaratne states.
Considering that customers are spoilt for choice when it comes to banking, relationships with banks and customer service are the only true differentiators. All banks understand this, he believes: “The sector has set a high benchmark in customer service. In terms of attracting customers, marketing plays a major role in helping banks stand out from the rest.”
Ariyaratne believes that financial inclusion is the responsibility of both public and private sector banks – and in fact, of all corporate citizens.
But he cautions that ultimately, banks have to be profitable and will have to prioritise expansion into regions that reflect economic promise while supporting others to overcome the challenges they face.
ECONOMIC PROSPECTS Examining the wider economy, he observes that the export sector in general has performed relatively well and is relieved to see steady growth in tourist numbers.
“Let us hope that the winter season, which is the peak time for tourism, witnesses a resurgence of the industry. Investment potential has been hampered due to many factors. As long as we remain on top of the challenges – and ensure political stability and policy consistency – investment will accelerate and there is no reason that we should not be optimistic,” he declares.
Ariyaratne surmises that “with political stability being restored, it should once again be ‘business as usual,’ which will offer a reprieve from the ‘wait and see’ mode adopted by most investors and businesses.”
Overall, he isn’t too worried about the prospects for the national economy. “We have faced these economic cycles before and expect the present depressed conditions to be reversed with an improvement in business sentiment,” he concludes.