Sri Lanka’s decision to restructure its foreign currency debt in 2022 has impacted commercial banks deeply. First, banks hold foreign currency debt and now have to contend with future losses on these. They also have to figure out how to provision for anticipated losses and account for these. Second, the economic crisis has impacted businesses, both private and state-owned which are finding their loan service to be challenging. And third, high interest rates and the deteriorating outlook have made capital expensive.

However, among commercial banks, People’s Bank is uniquely placed. Its exposure to some economic crisis-related risks is lower than other commercial banks and greater in other areas. In an interview, Acting Chief Executive Officer/ General Manager, Clive Fonseka discussed how he intends to navigate the bank.

You are taking on the responsibilities of Acting Chief Executive Officer/ General Manager of People’s Bank during a challenging economic climate. What are your priorities?

The banking industry was hit by a sharp rise in interest rates leading to a rise in our cost of deposits. There was no significant lending growth. For example, when you consider lending to retail customers, People’s Bank’s facilities are mainly four to five-year loans with interest rates of approximately 10-12%. Although banks are legally entitled to increase interest rates, we have opted not to do so due to the additional burden on our retail customers as of now, as they are already challenged by increased living costs and changes to taxation. The changes in the economy as well as our decision to forgo increasing rates had an impact on our profit and loss account. As a result, maintaining our position as a profitable bank was challenging.

The second challenge was maintaining liquidity. The sovereign credit rating downgrade caused People’s Bank’s foreign currency borrowings to decline. Despite our reputation as a leader in Sri Lankan banking, foreign banks were not in a position to provide foreign currency facilities.

Considering the impact the present situation has had on Sri Lankan Rupee interest rates, many companies and individuals have sought moratoriums which have negatively impacted our cash flows and liquidity.

You must be keeping a sharp eye on the health of the lending book. Has this been a challenge to People’s Bank?

People’s Bank has taken an understanding approach when it comes to the ability of customers to repay loans. Therefore, we have extended moratoriums to affected customers and taken a flexible approach to repayment, which was beneficial to our customers.

How are you approaching the growing loan delinquencies?

Our main focus during these tumultuous times is the health of the lending portfolio. With the increase in interest rates by approximately 20% from the levels seen in April 2022, we have been compelled to increase the interest rates applicable to facilities provided to corporates. Due to the present economic conditions, we have seen an increase in loan delinquencies.

However, to make it possible for our customers to weather the crisis, we remain open-minded, and we have taken measures to lengthen loan tenures and provide capital moratoriums to reduce loan delinquencies.

While we do understand the resistance by some of our customers, People’s Bank is also an institution which is required to maintain profitability to retain the confidence of its customers and stakeholders.

What is the likely impact on People’s Bank and its balance sheet, from the proposed restructuring of sovereign debt?

People’s Bank is one of the banks that is least affected by the restructuring of Sri Lanka’s external debt. We’ve provisioned thirty-five cents for every dollar for our exposure to Sri Lanka Development Bonds (SLBDs) and International Sovereign Bonds (ISBs). The total value of these bonds is an estimated $49 million. People’s Bank has purchased these ISBs at a discount of approximately 40 million dollars from the secondary market. Compared to other local banks, our exposure to foreign currency bonds is much lower.

As we possess a large treasury bill and bond portfolio any impact of domestic debt restructuring will significantly impact the bank. In an attempt to better understand the potential impact, we’ve analysed several scenarios and presented the findings to our stakeholders. However, the direction of these discussions remains unclear and we are currently unable to make an accurate estimation of the impact of domestic debt restructuring on our balance sheet.

People’s Bank, along with several of the nation’s banks, has made provisions for foreign currency international sovereign bonds. How has the banking industry and People’s Bank, provisioned for the possibility that domestic debt too would require restructuring?

The banking industry has not made any significant provisions for treasury bills and bonds. Since the domestic debt restructuring discussions are ongoing and with no clear outcome as yet, I am confident the sector would take the necessary actions when required.

It’s been suggested there could be an extension of maturity on domestic debt, particularly treasury bonds. How do you think the banking industry will react to restructuring that is limited to an extension of maturity?

My view is that an extension of tenure would be a better alternative compared to a haircut on capital or interest coupons.

Our bonds portfolio is booked at amortized cost. People’s Bank identified the interest rate structure and booked bonds appropriately. We did not resort to transferring these bonds from fair value through trading or fair value through OCI to amortized cost. As a result, there was no requirement for us to seek relief from mark-to-market losses from such transactions. There are no skeletons in our closets, our balance sheet is clear, in that sense.

Your lending to state-controlled enterprises such as the Ceylon Petroleum Corporation and the CEB may come with challenges. There have been some announcements in the most recent budget as well as subsequent statements about the CPC’s outstanding debt to the bank. What is the current situation?

The budget proposed to transfer the CPC’s outstanding dollar debt with the state banks in December 2022, amounting to around $2.4 billion to the government Treasury at the finance ministry. We have been informed about this transfer, which is ongoing.

An expected repayment of $2.4 billion to two state banks from the treasury will bring back significant foreign currency liquidity, wouldn’t it?

As of now, this exposure is booked in USD. We are negotiating with the Ministry of Finance about the terms of the settlement of this exposure.

What are the solutions you are exploring for this?

The ideal solution would be for the Ministry of Finance to take this debt in foreign currency itself. CPC, in the recent past, has been progressively reducing its dollar exposure. We are confident that the Ministry of Finance too will follow a similar course of action.

Let’s talk about your customers. People’s Bank has over 14 million account holders. Many customers will have had mortgages and loans. How do you balance the interest of the bank and those of your account holders?

Most of our retail loans have been provided to government sector employees. These employees have received a Rs25,000 to Rs30,000 cost of living adjustment increase during the past year. As per our calculations, a 3-4% interest rate rise would lead to only a small increase in the loan instalment.

Despite the practical considerations of maintaining the bank’s liquidity and profitability, we still have our customers’ best interests at heart. This is why we have taken a compassionate and flexible approach by also allowing extensions on loan payment periods. This decision will be taken after due consideration as the Bank has to maintain our interest margins to maintain our profitability.

When you extend loan tenures, does it then go outside the existing loan covenants and require a new agreement?

Many banks including People’s Bank have included clauses in our loan agreements which allow us to increase interest rates and extend the duration of the loan facilities.

You have recognized the need to be profitable despite this crisis. One reason for this is that banks are required to have a minimum amount of capital to back the risk they undertake. Currently, the cost of capital in the market has risen sharply. How are you placed with capital now and is it adequate for future balance sheet growth?

People’s Bank’s total capital ratio is the highest among the leading local banks. We were able to raise a substantial amount of capital, amounting to 30 billion rupees in subordinated debt when the interest rates were significantly lower during 2019 and 2020. We raised this amount in tranches of 10 billion and 20 billion rupees and the weighted average cost of these instruments was approximately 11%. Furthermore, we were successful in issuing 5 billion rupees in perpetual bonds in 2021. As a result, People’s Bank does not require any additional capital at this point. If there is a requirement to raise capital, we would do so in the latter part of this year so that the cost of these capital funds will be less.

We discussed the effect this crisis has on your customers. How do you balance competing interests of maintaining profitability, liquidity and customer satisfaction with maintaining the cooperation of the government, especially in the current climate?

Our priority would be to manage the liquidity and the profitability of People’s Bank. However, that does not take away from our customer-centric approach and continued support for the development of Sri Lanka. Most of the essential imports such as oil, coal, pharmaceuticals and fertiliser in the recent past were facilitated by People’s Bank.

Our funding to SOEs to provide essential public services is ongoing and is expected to continue into the future. We have demonstrated that stakeholders’ interests are given priority at all times.