People’s Bank Chief Executive and General Manager, Clive Fonseka, contemplates the bank’s response to the economic recovery in Sri Lanka and the policy changes affecting the banking industry. In this interview, Fonseka discusses the bank’s role in supporting the nation during challenging times as one of the biggest banks in the country, its strategy for lending to various sectors, including corporate, SMEs, and retail, and its efforts in digitalization. He also addresses the impending changes in the Banking Act, challenges related to state-owned enterprises lending, non-performing loans, and the proposed recapitalization and involvement of strategic investors, expressing confidence in the bank’s ability to maintain a high level of return on equity and highlights the importance of teamwork and adapting to the evolving economic landscape.
After several years of lacklustre performance, Sri Lanka’s economy is showing signs of a recovery. How does a potential recovery change your approach to banking?
As a state bank, People’s Bank has consistently been at the forefront of providing essential support to the nation and the general public, especially during the recent challenges. We played a pivotal role in supporting the government by facilitating the financing of essential imports, including petroleum, coal, fertilizer, and pharmaceuticals. People’s Bank accounted for around 50% of all oil imports into the country and handled the entire coal importation process. We faced liquidity challenges when called upon to deliver these critical services but navigated these difficulties by making tough decisions, and presently, whether in dollars or rupees, our liquidity position is robust.
With the ongoing economic recovery, we firmly believe that there is substantial potential for us to extend our lending services to various sectors, including the corporate sector, SMEs, and retail banking.
One noteworthy government initiative is the digitalization of public institutions, and People’s Bank has made remarkable progress in our digital transformation efforts. Our strategic objective is to position ourselves as the preferred partner for government entities, local governments, schools, and all other government institutions, leveraging our robust existing relationships with them.
Our strategy entails attracting these entities to utilize our digital services, encompassing payment gateways and POS terminals. Furthermore, we have implemented measures to bolster foreign exchange inflows, resulting in a substantial increase in foreign remittances and exports within a year. Our commitment is to sustain and build upon this positive momentum moving forward.
Where do you think your growth opportunities will come from?
Given the anticipated changes in the Banking Act, we foresee restrictions on lending to state-owned enterprises (SOEs) and a substantial reduction in the current single-borrower limits, necessitating a fundamental shift in our business model, compelling us to redirect funds from SOEs towards lending to corporate entities, SMEs, and retail customers. To effectively navigate this transition, we are immersed in a capacity-building drive, and our overarching objective is to strategically position the bank to capitalize on the opportunities arising from these forthcoming changes.
How will you manage this transition?
Having the right personnel in place is crucial for effective credit evaluation, spanning from the corporate banking level to our branch network. To facilitate this, we’ve instituted dedicated credit units at both regional and branch levels. It’s worth noting that a substantial portion of our transactions, approximately 75%, now occur through digital channels, and we recently marked a significant milestone with our 2 million digital customers. Our strategy includes further enhancing our digital engagement capabilities, which will free up branch staff to focus more on lending activities.
In addition to our HR initiatives, we are undertaking comprehensive efforts in various facets of our operations, including HR and risk management at the head office level. However, HR remains our top priority. Furthermore, we’ve introduced a specialized sales team tasked with providing branch-level support across a range of functions, including handling exports, imports, short-term loan facilities, and structural requirements. Given our extensive branch network, which comprises 747 branches and service centres across Sri Lanka, we often engage with numerous customers. In cases where a particular branch lacks the requisite expertise, our dedicated sales team steps in to collaborate with the customer and determine the optimal solutions for their needs.
Our primary focus is reshaping our business model, driven by the impending requirements of the new Banking Act. This adaptation is imperative to avoid a significant reduction in our assets, which includes loans and advances. Our overarching goal is to maintain our momentum and ensure the effective deployment of funds received from state-owned enterprises (SOEs) into the private sector, with a specific focus on sectors such as SMEs and retail customers. Leveraging our extensive network of 747 branches and service centres, we can execute these initiatives effectively. As we look ahead, we anticipate robust foreign exchange inflows, prompting us to explore opportunities with import customers and trade finance clients.
State banks have a significant exposure to SOEs. How do you anticipate this situation will evolve?
The lending landscape for state-owned enterprises (SOEs) is primarily overseen by state banks, such as People’s Bank. On the other hand, private sector banks are anticipating changes in the Banking Act, which will result in reduced single-borrower limits. This will compel private banks too to explore new customer segments. Notably, the Central Bank has introduced the concept of interdependency in conjunction with the Banking Act. Under this framework, if companies are considered to have interdependencies, the single-borrower limits may be reduced, potentially leading to a more diversified lending portfolio.
An important concern we are closely monitoring relates to the increase in non-performing loans (NPLs) alongside performing loans. This issue is of significant importance to us. In response, we have recently established a dedicated rehabilitation unit to engage with our customers. We have actively pursued initiatives related to restructuring and rescheduling facilities, as well as extending moratoriums in cases of genuine need. As a result, we have successfully revitalized a substantial number of facilities, and we are committed to continuing these efforts.
Managing the volatility in interest rates is another challenge we are addressing, especially considering instances where interest rates unexpectedly surged from single digits to 30% in the past. For fixed-rate facilities, this remains an area of concern. Notably, most retail loans typically come with fixed interest rates, which adds to our concerns. However, we have a lesser degree of apprehension concerning corporate loans. This is because corporate loans are primarily based on the Average Weighted Prime Lending Rate (AWPLR) plus a margin. This structure aligns with our funding model, which operates based on the AWPLR minus margin, and our deposits are raised at these levels. Therefore, we are not overly concerned about the performance of corporate loans.
We are well aware that many small and medium-sized enterprises (SMEs) are currently facing significant challenges. To the best of our abilities, we have provided concessions to support them during these difficult times. Furthermore, we are actively engaged in ongoing discussions with these SMEs to initiate the restructuring of their facilities.
In addition to our SME portfolio, we also have a corporate banking division that manages a substantial private sector lending portfolio. Our corporate banking segment is robust, and we have established strong relationships with numerous blue-chip corporations and multinationals in the industry.
The national budget for 2024 proposes giving a 20% stake in the two largest state banks, including People’s Bank, to strategic investors. In addition, it proposes a Rs450 billion allocation to help the banking sector improve capital. What is the bank’s position on these?
Under the existing provisions of the People’s Bank Act, the government of Sri Lanka is the sole shareholder. Consequently, various aspects of the legislation will require modification. We will communicate these necessary changes to the Ministry of Finance, and discussions involving both state banks and the Ministry of Finance will likely take place to facilitate the process.
Presently, People’s Bank maintains one of the industry’s highest capital levels, with a capital adequacy ratio of around 16%. The motivation for the proposed recapitalization comes from the asset quality review conducted by the Central Bank, which included several local banks. This review has highlighted the possibility of an anticipated capital shortfall in some banks. However, it’s important to acknowledge that there’s still uncertainty regarding the allocation of the Rs450 billion rupees among banks and the eligibility criteria for each bank. Therefore, it’s premature to provide specific details on this matter.
People’s Bank has had impressive return-on-equity (ROE) for several years. How confident are you in maintaining that level of ROE performance?
As we look ahead to the coming year, we anticipate confronting substantial challenges driven by prevailing economic conditions that have exerted significant pressure on our profit and loss statement. In response to these challenges, we have provided necessary concessions to support our valued customers. However, despite these immediate hurdles, I remain confident that as the economy embarks on its journey towards recovery and stabilization, we will be well-positioned to restore our profitability to levels seen in the past.
While acknowledging the importance of elements such as digitization and cost control in maintaining a competitive advantage and the potential for achieving higher returns, our paramount focus will be on the evolution of our business model. This evolution is not just a strategic choice but an imperative one, as the failure to adapt may lead to substantial reductions in our margins and potentially impede our bank’s growth prospects. Therefore, our unwavering commitment is directed toward enhancing efficiency and cost-effectiveness across the organization.
In tandem with these efforts, we are actively exploring alternative avenues for deploying the funds generated from state-owned enterprises (SOEs). This strategic approach is geared towards enabling us to adeptly navigate the evolving financial landscape, ensuring the sustainability of People’s Bank, and potentially even enhancing our Return on Equity (ROE).
How are you aligning teams at People’s Bank to meet the demands of the evolving economic landscape and the bank’s need to transform?
At People’s Bank, we are fortunate to have a youthful yet highly experienced team. Our team members bring valuable expertise from various fields, including branch operations, corporate & enterprise banking, treasury, digital and risk management. Our continued success hinges on our effective collaboration as a unified team while maintaining a clear strategic direction.
It’s crucial to emphasize that our team possesses both the necessary experience and capabilities to excel in their respective roles. The key driver behind our accomplishments is our collective teamwork. We are dedicated to forming teams that excel in evaluating loan proposals, making lending decisions based on cash flows, fostering a strong sales culture, and, most importantly, prioritizing a customer-centric approach. Our unwavering commitment revolves around understanding our customers’ perspectives and delivering convenient and tailored solutions to meet their unique needs.
Looking ahead, I maintain great optimism about our prospects. Our journey thus far has been exhilarating, and I firmly believe that by continuing to execute our strategies with precision, People’s Bank will undoubtedly establish itself as a formidable force in the industry. My unwavering confidence in our team’s capabilities reinforces my belief in our potential for greatness.