People’s Bank: Navigating challenges and driving growth through economic turbulence

People’s Bank CEO Clive Fonseka
PIX BY NISAL BADUGE

People’s Bank has faced significant challenges in the recent years, exacerbated by the Covid-19 pandemic and ensuing economic crisis. 
Nevertheless, the bank has been at the forefront of supporting the government’s efforts to stabilise the economy and its stakeholders. These challenges prompted a re-evaluation of the bank’s strategies, leading to bold measures that began to bear fruit towards the end of 2023, resulting in improved performance.
In an exclusive interview with Mirror Business, CEO Clive Fonseka highlighted the bank’s journey through Sri Lanka’s worst economic crisis in history. He emphasised the need for continuous improvement and discussed the bank’s current standing and future aspirations. Efforts are underway to maintain momentum and further enhance the bank’s performance.
Following are the excerpts from the interview.

A key area of focus should be the transformation of our lending focus from the SOEs to the private sector. It is crucial that our lending practices prioritise quality lending to ensure sustainable growth

The last few years have indeed presented significant challenges, especially given the stressed economic conditions. Could you elaborate on the implications of these conditions on the banking sector?

The banking sector, including People’s Bank, faced a unique set of challenges. But for us, they were quite different. In the 2021-2022 period, we, at People’s Bank, encountered a substantial liquidity crunch, a significant portion of which was directed towards funding the national and governmental requirements. For instance, during the foreign exchange crisis, People’s Bank facilitated approximately 50 percent of the nation’s oil imports, contributing to a major liquidity and dollar shortfall.
Our primary focus during this period was to manage this liquidity crisis effectively. In 2023, we found ourselves constrained in our ability to conduct regular banking operations for much of the year. This led to a significant decrease in our profit and loss compared to 2022, as we were forced to curtail the normal business activities and implement measures to address the liquidity challenges.
Additionally, the economic downturn led to an increase in non-performing customers, requiring us to provide substantial concessions. Despite these difficulties, we are pleased to report that we successfully navigated these challenges and ended the year on a positive note.

Where does People’s Bank stand now? Are you satisfied with the financial performance?

People’s Bank ended 2023 with a total operating income of Rs.96.8 billion and pre-tax profit of Rs.19.3 billion, on a consolidated basis. Of the bank’s standalone earnings, close to 50 percent was attained during the final quarter alone. This signals a strong momentum for the coming years. 
The total statutory liquid assets and capital adequacy reached all-time highs of 38.4 percent and 17.4 percent. And the digital customer base expanded by over 40.0 percent to reach 2.3 million, becoming the country’s largest to date.
We are currently on a positive trajectory, moving forward. In the final quarter of the year, we resumed lending operations and other activities, which has bolstered our confidence in our direction. We are particularly pleased with our financial performance.
One significant achievement is the reduction of our exposure to the state-owned enterprises (SOEs) from 54 percent to 44 percent by December 2023. Our target is to further reduce this to 32 percent by the first quarter of 2025, a goal that we are actively working towards and are confident we can achieve.
One key positive aspect has been our successful liquidity management. While it was a significant issue towards the latter part of 2022 and into 2023, we effectively addressed it. We are now in a position to lend to the key sectors of the economy, reflecting the progression of the economy itself. With ample capacity and funds, we are well-equipped to support these sectors. Furthermore, as remittances continued to increase, our market share tripled last year. The exports have significantly contributed to the inflows into the bank. This year, we have an ambitious target with our export customers. We are confident we can double the export inflows from last year. Despite the challenges, such as deposit fluctuations, we achieved a milestone in 2023 by recording the highest number of deposits, indicating a positive trend in customer confidence and financial stability.

For the 12 months ended on December 31, People’s Bank saw a year-on-year dip in the total operating income, net interest income, profit before tax and profits. What attributed to these contractions?

It was mainly due to the foreign exchange and dollar liquidity issues that we were faced with. In the 2021-2022 period, we had to provide significant funding for the government, which strained our resources. When the interest rates rose, we were unable to increase our lending rates in line with the market, which affected our net interest income.
Additionally, due to the restructuring of the SOEs, we were compelled to offer some facilities at below-market rates. This decision had an adverse impact on our profit and loss statement, further contributing to the contractions in our financial performance.

What are the areas the bank could have performed better in and should improve going forward? What are the areas of key priorities? 

A key area of focus should be the transformation of our lending focus from the SOEs to private sector. It is crucial that our lending practices prioritise quality lending to ensure sustainable growth. With a vast customer base ranging from infants to the elderly, we offer products and services catering to nearly everyone, including SMEs, micro SMEs, top private sector corporates and the largest SOEs in the country.
Another important area is loan recoveries and restructuring. Given the contraction in our financial performance over the past two years, managing struggling customers with extreme care to prevent an increase in non-performing loans is paramount.
Furthermore, we need to enhance our customer services to compete more effectively with the private banks. The recent developments, such as our ability to engage with the multinational corporations and the growth in retail banking relationships, indicate that we are moving in the right direction. Continuing to improve in these areas will be crucial for our future success.

Stricter rules on credit risk, appointments of chief officers and restrictions on individual borrowers are to be rolled out. What is your take on this? How necessary is this?

We view these measures as a positive step in the right direction. This trend is not unique to Sri Lanka; the banking sectors worldwide and in the region have been moving towards such developments. The recent failures of large conglomerates have highlighted the importance of such regulations in safeguarding the sector.
At People’s Bank, we have always prioritised the best practices and compliance, so these changes are more about fine-tuning rather than a major overhaul. Overall, we are supportive of these measures, as they enhance the stability and sustainability of the
banking sector.

On the debt restructuring exercise, what is the impact on People’s Bank and what is the status in this regard?

Regarding the overall debt restructuring exercise, People’s Bank’s impact has been relatively minor compared to others. Our exposure to International Sovereign Bonds is minimal and we have successfully settled any Sri Lanka development bond issues. Additionally, our few foreign currency banking exposures have been adequately provided for, so there are no issues in that regard.
The main challenge we are facing is related to the restructuring of the SOEs. In particular, about US $ 2.45 billion of the exposure to Ceylon Petroleum Corporation was transferred to the central government. People’s Bank’s exposure in this regard is approximately US $ 1.1 billion. Discussions on this matter are at an advanced stage and within a month or two, we expect to have a clear understanding of the final settlement terms.

The parate suspension has sparked debate and its impact on the banking sector is significant. This move is expected to provide breathing space for the borrowers but its effectiveness remains a topic of discussion.

For People’s Bank, the average number of parate executions over the past three years has been around 10 per year, indicating that it is used as a last resort, after all negotiation avenues are exhausted. This demonstrates that parate has been a helpful tool for the bank, as it often prompts customers to engage in discussions to avoid such measures. This typically results in the restructuring or rescheduling of loans.
However, the suspension of parate executions, as mandated by the government until December, could lead to changes in how the banks, including People’s Bank, approach lending against property. Without this option, the next legal recourse is more cumbersome, potentially leading to a reluctance to lend against property.
While the impact of the parate suspension until December may not be significant, an extension of this measure, as requested for three years, could require a re-evaluation of lending practices and strategies. The banks would need to carefully consider their approach to lending against property and explore alternative measures to manage credit risks effectively.

What is the outlook for People’s Bank for 2024?

The outlook for People’s Bank in 2024 is quite positive and bullish. Many of the issues that the bank faced in the past have been addressed, providing a solid foundation for growth. The progression of the economy also adds to this optimism, with expectations of increased profits from lending and other banking operations compared to the previous year.
A key focus for People’s Bank in 2024 is a more aggressive approach towards the private sector. This strategic shift, along with continued emphasis on digital initiatives, is expected to drive growth and profitability. The bank’s transformation towards the private sector is seen as a significant step forward.
However, the restructuring of the SOEs remains a challenge that needs to be managed effectively. If this aspect can be handled well, the future looks promising, not just for People’s Bank but also for the country as a whole.

Any message you would want to give to your customers?

If there is a message I could convey to our customers, both individuals and businesses, it would be this: People’s Bank is here to fully support you. We have demonstrated this commitment, especially during the challenging times like the Covid-19 pandemic, where we provided numerous concessions and were proactive in our support.
Customers can find comfort in knowing that People’s Bank, as part of the largest banking group in the country, offers stability and reliability. We are dedicated to serving our customers’ needs and have a range of products and services to cater to them. Our customer service is top-notch, with a strong focus on digital services to ensure convenience and accessibility. Additionally, we offer competitive rates to our customers and we will continue to do so.
In essence, People’s Bank is not just a bank; we are your partner in financial well-being, committed to supporting you every step of the way.