FINANCE SECTOR
SHORT TAKES
Compiled by Savithri Rodrigo
Krishan Thilakaratne
Mahesh Nanayakkara
Q: How would you describe the performance of the local banking and finance sector?
Krishan Thilakaratne (KT): Not very good. Nonperforming loans (NPLs) are at one of the highest levels in history and most banking stocks are trading at their net asset value while a large number recorded a return on equity below 20 percent last year.
Mahesh Nanayakkara (MN): It would be difficult to put the entire sector into a single generic basket but in general, all the main players have performed relatively well especially against the backdrop of multiple challenges they’ve had to face and overcome.
Q: Which business segments in the finance sector display the most promise, in your opinion?
KT The insurance sector displays the most promise – we see an upward trend with potential for considerable growth in the medium to long term.
MN In the light of the emerging tech driven business outlook, the retail segment would be the most promising sector, in my opinion.
Q: Do you expect macroeconomic pressures to put a strain on finance companies’ credit metrics?
KT Very much so but the more sound and resilient finance companies will eventually evolve to become stronger, which may lead to a consolidation of the sector.
MN Just as global warming impacts every country without exception, the macroeconomic outlook affects every sector including non-bank financial institutions (NBFIs).
Q: What are the key issues facing the sector at present, in your assessment?
KT The key issues at this point are NPLs, an extremely high tax structure, legal issues and delays in the system, human resource challenges including an ongoing brain drain and intense competition from within the sector.
MN There is a wide spectrum of players with diverse profiles, which leads to inconsistency. The regulatory framework is directed towards introducing standards that will undeniably permeate the sector – and of course, lead to higher standards.
Q: How have recent currency movements impacted your sector?
KT The impacts observed are in the long term and the outlook is negative.
MN They have a direct impact on interest rates, which discourages import policies etc.
Q: What are your main concerns on the regulatory front?
KT The most apparent concerns would be the delays there are to obtain approvals and decision making.
MN Regulatory measures to strengthen the sector (e.g., higher minimum capital requirements and capital ratios) would ensure a stable foundation.
Q: How are the Basel III capital requirements impacting your sector?
KT Smaller and undercapitalised companies will need to infuse capital or merge with larger players.
MN The tier I ratio will double to 10 percent by 2021 and tier II from 10 to 14 percent. Computation of ratios has been tightened, highlighting operational risk areas. The implementation of SLFRS 9 requires a higher level of impairment. While it is challenging, the sector will become more resilient and stronger after this transition period.
Q: What do you make of calls for environmental and social risk management, and sustainable financing practices?
KT While they augur well in a conceptual sense, the ecosystem must become more geared and supportive.
MN Businesses must embrace and integrate this into their business models. Leading financial institutions set up governance and management systems to embed social aspects into operations, to develop mechanisms that screen investments against environmental and social criteria. Uplifting the quality of life across social boundaries through non-consumption disruption has paved the way for business opportunities.
Q: Is the financial services industry doing enough to embrace e-commerce?
KT It has been slow in doing so but we are witnessing progress.
MN Emerging digital and e-commerce trends are rapidly changing business models in the financial intermediary business. Diverse players are embracing these changes at a different pace.
Q: How would the greater use of technology and digital transactions increase business for the sector?
KT Technology will pave the way for cost reductions and better pricing, while also opening new windows of opportunity by reaching larger and new client bases.
MN Emerging digital financial services will witness rapid progress in the coming years, creating a level playing field for new disruptive business models to challenge larger incumbent established players, to benefit the consumer ultimately.
Q: What is your take of the progress made vis-à-vis finan-cial inclusion in Sri Lanka?
KT I’m not very positive about it at present especially given the issues pertaining to the microfinance sector.
MN It is pleasing to note a more equitable distribution of GDP and key performance indicators across the provinces. While this signals that we are moving in the right direction, there’s a long way to go and much to be done.
Q: Is the sector likely to consolidate and reshape itself going forward?
KT With the various emerging dimensions and trends, I do expect the sector to reshape and consolidate as it moves ahead.
MN A definite ‘yes’ as this is the tone that the regulator has set by increasing capital requirements. The path to consolidation is inevitable.
Q: What avenues are available for the sector to innovate and expand – and what’s on the horizon?
KT The sector must begin to focus much more strongly on digital channels and products, partnerships and expansion into micro markets subject to the business environment. There are challenges in the short term; but the sector will evolve more strongly in the medium term subject to a few necessary corrections that’ll be needed.
MN With the emerging trend of adopting digital products and delivery channels, there will be opportunities like never before. Boundaries set for typifying financial institutions are becoming increasingly blurred. With a mindset of betting on responses rather than challenges, there will be many new opportunities to grow and compete for disruptors, and incumbent players, through both sustained and disruptive innovation.
Krishan is the Chief Executive Officer and a Director of Commercial Leasing & Finance
Mahesh is the Managing Director and Chief Executive Officer of Citizens Development Business Finance
The banking sector needs to cut down more on fixed costs by reducing brick and mortar presence and should drive the growth of digital servings via ATM Kiosks. Our bankers are still with the mindset that having large branch networks portray a bank’s strength. But this does not hold ground as it comes with so much maintenance cost for the branches and the high number of staff (with added security bill post the Easter attacks).
There is a huge rise of smart phone usage in SL of late and bankers should pitch digital offerings enticed with discounts for using same (i.e.) slightly better rate when opening FD via internet, and popularize it. In Singapore, almost all the retail services can be done with a click of a button without moving from your seat and the ATMs are equipped to offer a large number of services. Hence, it is high time that banks either close or merge some branches and enhance their offerings in the digital space, thus improving margins in time to come.
NPL’s are a real problem.