Professional Tenets
Posted on the June 15th, 2012 under Research & Views by Lanka Monthly Digest 
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BANKING ON FRESH PARADIGMS
Renuka Fernando unravels the dynamics shaping banking services
in present-day Sri Lanka – Roshini Galappatti gains interest
Q: What are your expectations for the banking industry, given the current concerns regarding the domestic economy?
A: We expect a growth of seven per cent this year, stemming from tourism, services and manufacturing. These industries are heavily dependent on the banking sector for working capital and capacity-expansion financing.
Credit demand will continue, even though we will see some adjustments as an outcome of the realignment of the Sri Lankan Rupee exchange rate.
Q: With the rupee continuing to depreciate against the US Dollar, what effects can we expect to see in the short to medium term?
A: The adjustment of the rupee exchange rate will have a positive effect on Sri Lanka’s Balance Of Payments position due to reduced demand for imports and enhanced competitiveness of exports. Banks will witness a short-term decline in import-related financing, and subsequent reduction in trade commissions and fee-based income.
However, exporters will see a positive impact on their margins, enabling banks to take on higher levels of debt to this sector as exporter-risk profiles lower. In the medium term, as the rupee settles, both import and export demand will resume at new levels, proving attractive for banks.
Q: Will the banks need to revisit their retail-banking products to retain their growth expectations?
A: Banks need to become one-stop financial supermarkets, offering traditional banking products augmented by total financial solutions in order to meet the needs of increasingly sophisticated customers. Technology needs to be better employed to deliver these products and services through multiple channels in a simple, speedy and efficient manner.
Q: Has there been an evident change in the dynamics of the banking business in the past quarter as against last year?
A: Tighter liquidity was evident during the fourth quarter of 2011, creating severe competition for deposits and thereby pushing deposit rates up. This led to higher funding costs for banks and narrowing Net Interest Margins (NIMs), as higher deposit costs outpaced the rise in lending rates. The sector was called upon to focus on managing liquidity. This placed stress on Loan-to-Deposit (LD) ratios which reached as high as 85-100 per cent. This eased in the first quarter of 2012. However, banks are now looking to attract non-deposit-based funding to support longer-term assets.
Q: What do you think is the scope for further expansion of the banking sector – and where can this growth come from?
A: Despite competition fostering product innovation and better pricing, the sector will face challenges in terms of shrinking NIMs, heavy investments in capital expenditure and tighter regulations. Sri Lankan banks have high cost-to-income ratios and the sector needs to be cognisant of costs, in order to post stable and sustainable returns on capital. Scaling up is a necessity to enhance efficiency.
On the positive side, banks will be called upon to support the aggressive growth that has been mapped out for Sri Lanka, which means that there is definite scope for the enlargement of the sector. It is then that scale becomes critical.
Q: What role will SME banking play in the future growth of the banking sector?
A: SMEs will be core contributors to the growth of the sector. There are about 18,000 to 20,000 companies in Sri Lanka, and 92 per cent are classified as SMEs. These will lead the growth in many of the sectors identified for expansion, and the banking sector is preparing to cater to this demand.
Unfortunately, the offer of banking products and services to the SME sector is still based on secured lending. As a sector, we must start providing services that go beyond this, and ensure we influence and facilitate an upgrading of knowledge and skills in the SME sector – especially in financial management.
Q: Where does Sri Lanka stand in terms of rural-banking penetration?
A: There is a lot of room for improvement. The sector needs to adopt a model where commercial banks can collaborate with established players such as regional development banks and other non-banking players who have ground-level infrastructure and operational capability, which reduces the cost of penetration.
Similarly, the sector needs to explore means to extend reach and build infrastructure by the prudent use of technology. Sri Lanka’s mobile-telephony penetration is very high with 16 million users, most of whom are comfortable with mobile transactions. Why not transfer them to mobile banking?
The interviewee is the Deputy Chief
Executive Officer of Nations Trust Bank
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Professional Tenets
