LMD 100 Q&A
HDFC BANK OF SRI LANKA
Q: Could you outline HDFC Bank of Sri Lanka’s medium-term priorities in the prevailing business landscape?
A: We’ve been working towards developing a more resilient institution. We intend to achieve this objective by developing the skills of staff members at every level, augmented by positive attitudes, and complemented by robust systems and processes.
Despite the need to preserve liquidity in a challenging environment, we have been consistently investing in these areas with a medium to long-term view. We’re already seeing the results of this approach by way of stable cash flows, narrowing technological gaps with larger players in the industry and low staff turnover.
We’ve developed a five year strategic plan (2021-25) with a set of objectives and operational targets to be achieved by 2025. In addition to this, we have set intermediate annual targets to be achieved during this five year journey, covering key areas such as capital, assets, returns, lending portfolio quality, deposit portfolio granularity and the bank’s credit rating.
Q: What is your assessment of the state of business in the country?
A: There is no doubt that the country is at a critical juncture. The threat of COVID-19 is expected to ease to some extent with a growing share of the population getting vaccinated both locally and globally.
As for the difficulties faced by Sri Lanka due to external debt and dwindling forex reserves, they will linger unless scientifically appropriate remedial action is taken.
Moreover, issues in fundamentally important sectors such as education and agriculture need to be addressed with urgency to avoid long-term disasters.
A stable macroeconomic environment would make decision making easier and quicker for entrepreneurs and business leaders. However, the prevailing and rather unsettled policy environment can keep investors away. A steady policy environment and market-based pricing system will introduce stability to the system and attract productive investments.
A properly designed system of antitrust laws is also needed to ensure fair competition and protect consumers.
Q: How has the banking sector been impacted by the country’s economic climate? And what is your outlook for the medium term?
A: COVID-19 has adversely affected all sectors. When customers of the country’s banks are affected, it will have an immediate impact on the banking sector.
Furthermore, the government has called on the sector to share a significant portion of the burden by way of offering loan moratoriums and waivers to affected customers. It has duly accepted and implemented this call in the nation’s interest.
The Central Bank of Sri Lanka injected a substantial amount of liquidity to alleviate the adverse situation faced by various economic sectors. However, this has also resulted in inflation and thereby a higher cost of living.
Banks will be affected by this in two ways: firstly, reducing borrowers’ disposable incomes will lead to more non-performing loans, adding to the already adverse situation caused by the pandemic; and secondly, staff members are likely to demand salary increases and other emoluments to safeguard their standard of living in turn increasing banks’ overheads.
Banking is now a technology driven business. Most of these technologies are from overseas suppliers so dwindling forex reserves directly hamper the sector’s investments in new tech, thereby slowing development. Even maintaining existing technology investments is becoming a challenge.
Q: What measures have been taken to sustain the bank in the past 12-18 months?
A: The pandemic has largely restricted the free movement of people as well as goods, slowing down all economic activities. Investments in online technologies became the panacea for everything and everybody.
HDFC Bank of Sri Lanka followed the same path. We quickly invested in technology including online meeting systems and paperless approval systems, while also replacing desktop computers with laptops and tablets.
Protecting our staff’s health is critical. Therefore, all the required health guidelines have been adhered to at the bank and all its branches.
We’ve also looked at reducing the risks in transit for staff and relocated them to branches nearer to their residences to minimise travel; a share of the personal transport expenses was borne by the bank as well.
And internally, we made changes to how day-to-day operations are conducted – the number of meetings as well as participants in each meeting were restricted, and all training is now conducted online.
Q: In what ways are innovation and technological changes impacting the banking sector?
A: Innovation and technological changes drive economic improvements, resulting in better living standards for people. This phenomenon applies to practically all sectors and banking is no exception.
In the banking sector, innovations are more visible in the payments and settlement arena. Mobile payment applications are spreading rapidly among banking customers due to the added convenience and round-the-clock availability.
The quality standards, and other features of internet banking facilities and websites are being improved consistently. The need for customers to visit brick and mortar branches is reducing day-by-day, and increasingly more banking transactions are conducted from the convenience of their homes.
Internally, the availability of management information has improved significantly, enabling us to make better decisions faster.
However, these improvements are not cheap. Banks have to invest heavily to provide these conveniences to customers. At present, technology investments are the second most substantial expense among banks after human resources. Therefore, customers must be charged reasonable fees to maintain and improve these new products and services.
Q: Is the prevailing interest rate regime conducive to business expansion?
A: The interest rate is the price of money, and it should be decided based on demand and supply.
A number of factors should be considered in this regard. In Sri Lanka, there are many retired people who do not have pensions and as such, they live off their deposits’ interest income. These groups expect higher rates of interest.
On the other hand, entrepreneurs expect low interest rates to make their investments more profitable. But interest rates that are too low will make low yielding projects more viable, thereby channelling scarce capital to such endeavours. This should be avoided as continuous investments in low yielding projects will create a low yielding economy in the long run.
Apart from this, local rupee interest rates play a significant role in bringing scarce foreign exchange to the country. Reasonably high rupee interest rates will encourage people to bring foreign exchange into the country and this will have a favourable impact on exchange rate movements.
While there is no clear answer to this puzzle, my view is that local rupee interest rates should be in the range of between 10 and 15 percent a year.