As Sri Lanka braces for uncertain outcomes from negotiations with the IMF and its creditors on restructuring debt and resetting the economy, KPMG is endeavouring to assist in building resilience and stability from within the banking and corporate sectors, from SMEs to large corporations, family businesses and state-owned enterprises. KPMG Sri Lanka’s Ranjani Joseph (Partner – Audit, Head of Banking Services and Markets), Thamali Rodrigo (Partner – Audit, Head of Corporate Governance and Enterprise Advisory), and Kamaya Perera (Partner – Head of Management Consulting) lead the critical areas of the firm that indelibly contribute towards the well-being of the economy

Ranjani Joseph on Bolstering the Banking Sector

The banking sector is the backbone of our economy and no stranger to economic shocks. However, the challenges from the 2019 Easter bombings, the Covid-19 outbreak and the unfolding crisis with Sri Lanka running out of reserves to pay for imports and defaulting on its foreign debt are unprecedented. I believe the banking sector is taking steps to mitigate risks arising from a possible haircut, although the form and scope of the debt restructuring are not yet known. However, there are two critical areas banks are contending with where KPMG is focusing on guiding.

First, when the debt repayment moratoriums came into effect after the 2019 Easter bombings and again after the Covid19 outbreak, the stage movements of loans were artificially stagnated, making it difficult for banks to value their loans using the traditional expected credit loss model built with historic data. Instead, banks had to resort to management overlays using various stress testing techniques, assumptions, and a lot of judgement to assess which loans became non-performing loans and when. That is where KPMG is making a difference by helping banks to make those decisions with reasonable rationale. We have multi-disciplinary teams in our Sri Lanka offices and specialists from our global network where some of the firms have gone through similar economic crisis experiences. We have a trove of knowledge and experiences to share with Sri Lankan banks, helping them to focus on building the necessary management overlays.

The second area keeping banks occupied is preparing for potential haircuts to their investment portfolio of government debt instruments in foreign currency, particularly ISBs. We are in unchartered territory because Sri Lanka has never defaulted before, so we have to wait and see how the IMF discussions and subsequent creditor negotiations pan out. However, since 2021 banks have been building buffers, as of June 2022 around 20%, in anticipation of a haircut to the ISB portfolios. Would that be adequate by the year-end is something for us to see. Again, deploying our global network, KPMG is working closely with banks to build those buffers over a period without causing sudden shocks to their balance sheets. We are also helping banks to be more transparent and improve the quality of their financial disclosures on these significant judgement areas because maintaining public trust is critical. What is especially important is that KPMG, as auditors, and the banks need to communicate to the public that the portfolio valuations are credible and based on rational thinking. We take that responsibility very seriously because KPMG plays a vital role in building public trust.

We are Energizing Enterprises – Kamaya Perera

Everyone in Sri Lanka, from individuals to start-ups, small and medium businesses, large corporations and even the government, is grappling with difficulties and uncertainties. They are finding it difficult to plan and are also struggling to survive, constantly pondering what they should do next. In this context, KPMG is committed to empowering enterprises of all forms and sizes, helping them to build stability and plot secure futures. We do this by deep diving into their businesses to identify the root causes behind their difficulties and provide solutions to rebuild robust foundations to preserve and conserve value and drive growth based on best practices. We delve deep to identify value chain leakages, supply chain constraints, cashflow issues, process inefficiencies, and management constraints.

The Management Consulting solutions we provide also look at formulating dynamic strategies, process enhancements, and investing in the right technology, that can transform an enterprise and deliver satisfactory ROIs.

We provide consultants who are problem solvers, who are agile, who cut across a variety of industries, as well as a variety of knowledge and skill sets. They come from various professional backgrounds, from transport and logistics to finance, data sciences, statistics, IT and HR, to help your enterprise survive this unprecedented economic crisis and discover opportunities to grow and thrive. Our team is uniquely positioned, to provide feasible solutions having worked across multiple industries small and large, and international development agencies with the know-how of detailed processes as well as the country’s overall direction. KPMG endeavours to sharpen policies, roadmaps, and strategies, collaborating closely with our clients, from MSMEs to strategically critical corporates and stateowned enterprises and government institutions, while also working with various international development agencies and banks who invest in the country’s social and economic growth priorities.

For Thamali Rodrigo, Supporting Family Businesses is Crucial

Family businesses are the backbone of the economy, accounting for over 80% of all businesses in Sri Lanka. If family businesses cannot sustain themselves through an economic crisis and grow, the effects on the economy will be severe. That is why KPMG has a dedicated team that focuses on family-owned enterprises, from SMEs to some of the largest corporations in the country. The revival of our economy largely depends on how these businesses perform under the prevailing distressing market conditions. KPMG is prioritizing facilitating these companies to survive. Beyond that, we also believe that that is our responsibility because we are one of the oldest professional firms in this country. Our association with Sri Lankan businesses spans 125 years and sustaining family-owned businesses is a key priority.

Fundamentally, there are two areas family businesses should focus on right now that would help them to navigate this crisis. First, a family’s support for its business is a source of incredible resolve and strength, therefore family should keep providing that support in one vision and voice during these difficult times. We conducted a post-pandemic survey and found that family businesses survived the crisis better mainly due to the family’s support as they have a long-term view towards the business. Second, a business should focus on professionalising and following good corporate governance practices.

Any family business can survive this crisis if the family support for the business could be sustained, and decision-making could be professionalised. But the hard part is how? That is where KPMG can help. We specialised in facilitating family businesses in arriving at the right solutions around these areas and implementing them into practice. Solutions to unique issues of each family business should be found within its business and the family, our role is to facilitate and help them to understand the situation and navigate towards the right solution. It should be noted that no third party can assist a family business if the family is not committed towards change.

To date, every family business we have worked with, that had committed itself towards the change we are suggesting is navigating this unfolding unprecedented economic crisis from a position of stability and strength. For all of us at KPMG, working with family businesses is deeply rewarding because we experience the transformations and impact KPMG can bring to bear.