Sri Lanka’s economic outlook is rapidly changing for the better, with lower inflation, lower budget deficits and more clarity on how Sri Lanka’s unsustainable domestic debt will be restructured.
HNB, Sri Lanka’s second-largest private commercial bank by assets, expects an announcement on the restructuring of Sri Lanka’s commercial foreign debt (the international sovereign bonds) to be concluded soon. Stronger balance sheets will leave banks better prepared to support their customers with working capital and trade financing.
In an interview, HNB’s Managing Director and Chief Executive, Jonathan Alles discussed the outlook for commercial banks and how HNB was preparing to double down on its core banking operations to support customers as the Sri Lankan economy emerges from a crisis.
Now that the government has announced how domestic debt will be restructured, how do you expect to manage HNB’s liquidity, growth, and balance sheet as a leader?
The announcement on domestic debt optimization (DDO) marks a significant and positive development that will free the banking sector to invest in government bills and bonds to ensure compliance with regulatory liquidity requirements and to meet our liquid asset requirements.
Currently, the markets have a liquidity surplus. But as interest rates decline we have an opportunity at the bank to allocate funds to more productive uses in the economy, like customer loans. Clearly, banks have to be at the forefront of a business revival in Sri Lanka.
Our top priority is to support customers. Over the past three to four years, credit impairment has been high. Banks have had to extend loan repayment moratoriums due to the country’s economic challenges. Now that an economic recovery is apparent, we need to both facilitate recovery and empower organizations to run their businesses successfully. In doing so, we can create a win-win situation for everyone involved and contribute to the overall economy.
The banking sector has a catalytic role to play in the revival of the country’s economy, so we must have a well-capitalized banking sector that will help reinforce stability, investor confidence, and trust. Similar to the efforts taken by the government in finalizing the DDO, we believe that the banking sector interest would be safeguarded with external debt restructuring as well.
We’ve taken steps to have adequate provisions, ensuring that the impact of these credit impairments and the outcome of the ISB negotiations remain within manageable limits.
Overall, to maintain strong capitalization, working diligently to revive customers and reverse their loan impairments are crucial to enhancing our capital and liquidity. Additionally, we need to support the significant economic sectors and industries, particularly those considered cash cows, as their fast revival is of utmost importance
Therefore, a robust policy framework is essential to ensure that bank liquidity and capital remain healthy. These frameworks play a catalytic role in supporting the revival of Sri Lanka by empowering its people.
How exactly does HNB expect to capitalize on growth opportunities?
While embracing a radical approach, it’s also time to revisit successful past strategies to address the urgent needs dictated by the current situation. Commercial banks primarily deal with short-term money, savings accounts, and deposits spanning three, six, or twelve months. To achieve a balanced book, it’s imperative to function as a commercial bank engaged in commercial lending.
Our strategy involves offering working capital facilities, facilitating international trade, and providing short-term loans. Neglecting this could result in a significant maturity mismatch between our assets (the loans) and liabilities (the deposits).
For Sri Lanka it’s crucial to nurture the development banking model, a practice still upheld in other countries where institutions like ADB, World Bank, AIIB, and various DFIs provide long-term funding support which can then be packaged and lent to businesses requiring longer-term project loans. In this model, development banks take on two vital roles. They handle project lending, and second, granting 8–15-year loans for companies acquiring long term-use business assets. Here these types of loans, in some cases, are offered by banks dealing with one-year deposit money.
In the current climate, some of these loans may be repaid more slowly, with durations of eight to ten years due to the three to four-year moratoriums that have been granted. Embracing the development banking model is imperative, enabling us to shift project lending and significant syndications towards supporting large SMEs to these specialist units or institutions. In the past, Sri Lanka successfully operated with institutions like DFCC and NDB, demonstrating the feasibility of this lending approach.
By doing so, commercial banks can concentrate on day-to-day operations, commercial activities, and working capital financing for customer entities, thereby mitigating risks associated with asset portfolios, including interest rate and maturity mismatches, and be forced more easily on addressing asset quality concerns. To ensure effectiveness, we too must focus on developing specialised skills in project finance and longterm funding among our commercial banking relationship managers.
Regarding asset allocation within the balance sheet, the emphasis should be on adhering to the regulator’s required minimum liquid asset ratio and placing funds accordingly. Further, caution should be exercised about large borrower concentrations, which is much better addressed with a shared facilities approach. Such sharing will be vital for enhancing lending in a dynamic and growing economy.
It is also an opportune time to explore banking consolidation, as the presence of so many banks increases costs in the sector and poses challenges.
One of the growing needs in the market is for housing, both new units and improvements to existing ones. One of our national priorities should be to strengthen housing banks and implement low-cost housing initiatives. The objective is to enable more people to own homes, thus reducing the long-term pressure on commercial banks and enabling us to redirect focus towards critical funding areas.
We must also address the disconnect that sometimes arises when customers experience growth turnover and have secured funding but need more education, financial literacy, and equity buildup to run parallel to growth. Unsustainable leverage may prevent us from providing further support to such customers. Additionally, we must ensure funds are reinvested in the business for its betterment and not diverted to other ventures.
In addition, an improved legal framework is paramount to safeguard loan recovery and prevent banks from hesitating to extend loans in the future. We must not encourage a culture of default, nonpayment, and indiscipline, as it could have severe repercussions on Sri Lanka’s financial sector stability.
At HNB we’ve advocated for aligning our focus on prioritizing specific sectors. We aim to support SMEs, microentrepreneurs, and emerging technology-led industries such as KPOs, and fintech while exploring derivatives of traditional banking like private equity and venture capital.
How can HNB assist Sri Lankan companies in expanding globally, joining global supply chains, and gaining market share as Sri Lanka embraces more international trade and economic openness?
The bank’s primary focus is on providing working capital support, aligning with our core mandate, rather than engaging in lending that has the features of equity funding. By adopting a proactive approach to resource allocation, we can assist Sri Lankan companies in expanding globally, joining global supply chains, and gaining market share in the context of increased international trade and economic openness.
HNB assumes a crucial role in supporting Sri Lankan companies’ global expansion and market share by actively participating in trade finance and fostering partnerships to facilitate imports and exports. We actively encourage new exporters’ development and empowerment, including SMEs and microfinance customers, through comprehensive support beyond mere financial assistance. Our e-commerce platform Cord360 is a valuable platform for connecting with international buyers and showcasing Sri Lankan goods and services overseas.
While supporting international trade, we facilitate companies venturing into foreign markets, providing the required funds with Central Bank approvals and guiding them in establishing operations.
Our state-of-the-art payment and cash management solution streamlines cross-border transactions, offering more efficient account management for multinational companies operating in different countries.
The bank has proactively focused on supporting Sri Lankan businesses, aiming to drive global expansion and market share growth. As Sri Lanka embraces increased international trade and economic openness, we remain committed to facilitating change and prosperity for the nation. At HNB, trade finance is at the core of our operations, earning us consistent recognition and prestigious awards like Euromoney’s Best Trade Services Bank in the country.
Our product suite caters to both importers and exporters, fulfilling all their needs seamlessly. We are also committed to developing new exporters among Sri Lankan companies, providing financial support, guidance and education to build their confidence and ensure sound business practices. By building confidence in this segment, we facilitate growth and help businesses establish valuable networks for international ventures. Moreover, our strong relationship with the Export Development Board and export chambers enables us to offer comprehensive support to exporters, including sponsorships and other assistance.
Beyond international trade, HNB actively supports companies seeking to expand overseas in Africa, Bangladesh, Maldives, or elsewhere. Through Central Bank approvals and our FCBU accounts, we provide the necessary funds and help establish operations in foreign markets, reducing risks and promoting growth.
HNB’s dedication to supporting Sri Lankan companies’ global endeavours underscores our commitment to driving sustainable growth and success in the ever-expanding international landscape.