Pan Asia Bank new CEO on challenging times ahead for the bank, industry

Nimal Tillakeratne took over as Pan Asia Banking Corporation PLC (PABC) CEO earlier this year. A 40-year veteran of the banking industry and a proponent of information technology, he is tasked with growing the young bank under the current challenging conditions. Mirror Business sat down with him for a chat on PABC and the banking industry

Pan Asia Bank has a new three-year strategy. Can you give us an outline of that?
The three-year strategy is focused mainly on the expansion of the network. We have a network of 83 branches, which is not a big enough footprint for a bank like ours. So we will look for around 120-130 branches in three to four years. Another thing is the strategy will more or less revolve on getting into digital channels and improving service orientation through IT initiatives.

We hear you’re very keen about IT?
Yes, I believe that IT, if properly used, enables good business. It also gives us the reach. We are a smaller bank. We have to wait three years to get the rest of the 120-130 branches up and running. So we have to reach the customers somehow or the other now and finish transactions then and there. I’m working towards that.
Central Bank Governor Dr. Indrajit Coomaraswamy recently said that we have to protect traditional banks from digital – that we have to take a measured approach. What do you think about that?
For me, digital banking and digitalization are two different things. Now we can digitize our day-to-day customer handling process. That doesn’t mean it’s digital banking. Digital banking is to drive customers towards self-service channels and making things easier for the customer, so that they don’t have to come to the bank. ATM is a digital channel, CDM, the cash deposit machine, is a digital channel. The Internet and SMS banking are digital channels. They have been there for some time in Sri Lanka. I’ve had a lot of discussions with fintech companies providing digital solutions and finally when you look at it, it’s the same old thing.
But they’re not like peer-to-peer lending and cryptocurrencies like Bitcoin and so on, are they?
Sri Lanka is too small and it’s too early for us to look at those things. They also don’t come cheap, so why do you want to spend millions of dollars developing something you’re not very sure about? The governor is very right about fintech companies. He mentioned fintech companies to sort of, say not to divert too much attention on the fintechs. He’s correct, because fintech companies come and offer us various things, which are not required by us.

With the move to digitization, are you seeing an increase in cyber attacks on banks? 
Yes, I mean, every bank has attacks here and there but mostly I haven’t heard of somebody attacking the core and trying to siphon out money and information—hacking—I haven’t heard about in Sri Lanka still. The cyber attacks here what I mainly see are the phishing attacks where the customer also is part of it, unknowingly. So our bank has a strong cyber security in place and we review it from time to time. And now that we have brought up the subject, I have started talking with an Indian company to come here and audit our strength.

One of the reasons for digitalization is to cut labour costs, isn’t it?
That’s in the long run; in the short run costs are very high. 
There are a lot of charges for using these banking channels. So in the long term, will the charges be removed? Isn’t the technology paying for itself?
I would say that’s the reason for digitization and pushing the customers to digital transactions in the medium to long term but initially—I was talking to a Malaysian company, their entire digital channel suite was priced at US $ 8 million—whether you can get a return on that money even in the medium term is a question. Too much of anything is not good for anybody. But digitization is a journey we want to take. So if you want to put up 100 CDMs and 100 ATMs, kiosks and all that, big banks can do that. A small bank like ours can’t spend too much capital on a kind of a long-term dream.
You’re meeting the BASEL III capital requirements in the short term. But given the credit growth witnessed in banks recently, the capital ratio will keep on dwindling. So what are your plans to raise funds in the near future?
I don’t think that problem is there now. If we had met our original targets and had we had this lending growth we had expected at the beginning of the year, then we would have had to go for new capital at the end of the year. But there wasn’t a significant growth in our credit for the first six months of this year. 

What has your credit growth been like?
Very small, we would have had around 5-6 percent growth.

So are the state banks mainly fuelling the credit growth?
Yes, that’s one thing I see. For January, February and March, I saw the Central Bank publication. There was around Rs.70 billion private sector credit growth. I don’t know where it has come from.
There’s the Rs.10 billion minimum capital requirement. But the 2017 budget said that it should be increased to Rs.20 billion. Fitch is also expecting this to be implemented by 2019. What are your bank’s plans?
My public opinion is that having heavy capital is good for a bank. But if you look at the Sri Lankan way of banking, you cannot really copy the BASEL II and III requirements as they are here. The way we work here is different. I don’t think we have massive shocks that the European and American banks have.

What if the minimum capital gets raised to Rs.20 billion?
A lot of banks will have trouble. Raising capital is not easy.

Will you look at a merger?
For raising capital, one hidden objective is to encourage the banks to merge. Raising Rs.10 billion for us—okay, when the time comes, we’ll look at it. We don’t want to jump the gun and say ‘Yeah we’re for mergers’ or ‘We’ll raise capital’.

Well, you must have plans formulated since this is a national policy?
Well, it’s been there for some time. The government is also in two minds, whether to have like Australia, five to six strong banks dictating terms? If we want the same model here, then the government forces us to merge and we have to oblige.

On interest rates what’s your opinion about the current trend?
Interest rates were raised in the market to curtail credit, but if you look at the first quarter, or even up to May, the growth in credit. I think the objectives are going in a different direction. In the last report I saw that credit growth has stabilized and is moving downwards, than even the pricing also. The normal retail loan is about 17-18 percent. People can’t afford to pay at those rates, so banks have to find a way to control their costs and even if you find many other ways of increasing income and controlling costs, the relative increase in deposit rates also hits us. It’s hurting us very much. Finally, interest rates have to stabilize at a lower level. Otherwise the development rate will slow down. Now we see housing markets are dwindling and consumer markets are on the rise. These people aren’t interested in repayments and the retail sector NPLs (non-performing loans) are rising all because of these rates. An year-and-a-half ago, it was like 9-10 percent; now it’s almost double.

So you’re expecting NPLs to keep rising?
On the retail side yes, it’s obvious, unless we have a very strong recovery mechanism in place. That applies to any bank, not just us.

Are you having third parties collect loans?
We give small ones to third parties. Very small ticket prices. The big ones we try to recover ourselves. Anyway most of our loans have adequate collateral.

Recently the cap on lending rates was removed. Where do you see the loan growth coming from to maintain the past momentum?
When the cap is removed, it can generally convince the banks to increase the lending rates. But I have a different opinion. I cannot tell you now. I want to leverage that positively. I don’t want to raise rates and make a quick buck. That’s not a good idea.

But which type of products will banks try to push after this? Will it be housing loans?
I see it going off in a different direction. A bank used to give loans at 14-14.5 percent. Now you will see banks lending at 16 percent or even 18 percent, so what will happen is the demand for the housing market will come down because people can’t afford 17-18 percent rates.

Won’t that be good in terms of preventing a housing bubble?
This residential boom has two markets. Some people buy condominiums purely for reselling, to earn a quick buck. But there is a market, the Rs.20-25 million market, where people want to live in them. The problem will not be on that market, but on the other market where there’s speculation. They’re willing to give up, anytime.
Fitch was saying that Sri Lanka’s total credit to the private sector is low compared to Asian countries.

What are your views and what sectors can credit be channelled to?
Well, if Fitch says it’s so, I have to accept it. I don’t have research into other markets like Fitch does. The issue is those countries Fitch talks about may have different cultures and ways of living. In Sri Lanka it’s different. Our culture is a bit more traditional. We like to save and we don’t want to spend everything. 

What sectors do you think credit can be pushed into?
SME is the most viable sector. SME also brings us CASA. Here, we want to keep SMEs and retail loans at around 80 percent of our book and give lesser attention to corporates because corporates have import-export businesses and servicing corporates is expensive, in terms of the rates and margins. Our focus is on retail and SMEs and recently we started focusing on SMEs with trade components.

Won’t transaction costs be high with SMEs compared to corporates?
Not the transaction costs but administrative costs are high. Transaction costs are good for us because margins are high.

So the transaction costs make up for the high administrative costs?
Well, not really and that is why digital channels can play a big role. 
Some academics say that the SMEs could afford to pay as high as 25 or 30 percent. Is this realistic?
No. I don’t think so.

But SMEs can generally pay higher rates than others?
Yes. A corporate won’t go for more than 14 percent. A mid-sized SME can afford to pay around 17-18 percent. Also, when it comes to corporates, there’s a lot to look at – balance sheet analysis and things. For SMEs, it’s a simple process. Mainly, it’s the relationship that we have. We know his history and his character. That makes it easier. He doesn’t have tens of accountants and his running costs are lower.

Lending rates tend to go up overnight but deposit rate increases tend to lag behind. Why?
Yes, there is a disparity there. I agree.

How is that respecting your depositors?
In deposits we have a contract. In lending contracts, we have a clause where the banks at their own discretion have the capacity to increase the rate. We use that and get it, but at which level can we do that? We start at 14 percent, then 15 percent and 16 percent, then some of the customers want to go away from us. Once we reach 18 percent, especially no one will want to take a loan. That is why—well I can’t speak about other banks—but our bank had this problem, where we were pushing at high rates. We have realised that it’s not going to work. Now we are trying to come down and see whether we can find niche markets where we can lend, more or less relationship-based lending and not just a one-off housing loan or a loan for consumption.

So despite the removal of the lending rate caps, you will see the banks lending at current rates and cutting costs?
Well, for credit cards, I saw that except for two foreign banks all other banks have intimated to their customers about increasing their rates to around 28 percent. We haven’t made that decision yet. From 24-28 percent, it doesn’t look very high. For example, monthly for Rs.400,000 it will be another Rs. 200-300 increase. 
But then the perceptions? That the banks are waiting to increase rates whenever they can? That’s something that I don’t want to create among our customers. We will be careful in making that decision and we will not be aggressive when increasing rates. We want the customer. For the short term getting 4 percent more and long-term suffering, I don’t like. I want to have a balance there.

In other loan categories?
Still not. Look, there was no major change in the dynamics on the deposit side. Then I don’t think it is prudent for us to increase rates on the lending side.

What about in the market, in general?
I think for the consumption and retail products, banks will increase rates. For home loans, since they are contracted loans, unless the customer agrees to subsequent changes, they will remain. A previous bank I worked for, it increases housing loan rates from 9 percent to 13-14 percent; they found a huge NPL segment. Then they had to adjust. 

How well are you competing for CASA (current and savings accounts) now that more customers are switching to fixed deposits (FDs)?
In the entire industry, CASA is coming down rapidly. When the margin between a CASA account and a fixed deposit was 3-4 percent, people wouldn’t mind, but now it has widened. So, our CASA is around 20 percent. We should have 28-30 percent CASA to give that benefit to the customer on the lending side. It hasn’t happened that way. Getting CASA is not a straightforward thing. You have to offer other peripheral services to the customer to get it, like if you handle his salaries, his housing loan, his personal loan. Then he will have to make that account his primary one and he starts building a CASA with us. Going to the market saying give me CASA, that won’t work. There are successful strategies. I know one bank has a beautiful children’s savings account. That’s one of the best I have ever seen. I worked with that bank. Here also, our bank has been trying to build our book with fixed deposits because it’s easy to build. But sustainability is the question. My objective is to come out of this FD and term deposits mentality and build a CASA book as much as possible. Otherwise, the costs will be very static. 

Is that why you’re offering products like the Champion Saver?
Yes. Well I would say it’s a savings account although we have a substantial balance there. It’s an offer for the customer to park his money with a good rate until he knows what he wants to do with the money. The reason for that is if you get Rs.1 million FD for three months or one year and if your requirement comes before that, you have to uplift with a penal rate, which maybe makes it less than the rate that we offer for Champion. With Champion, the 8 percent we offer, the customer can take out the money any time he wants but still he gets the same rate. 
So though we take it in the CASA, because it costs less than a FD, it is a place to park your extra money until your investment is done.
We’ve seen this in the past as well, where the banks offer saving products with 2-3 percent higher interest rates and they keep it at that rate for about six months until they build cheap funds and they bring the rates down to the market rate without telling the customer. That’s a bit deceiving, don’t you think?
Well, it is deceiving but okay. When you run out of liquidity, you try to use this—I can’t say it’s a tactic—method to get money into the books. I don’t blame that even because we also sometimes do that. But everybody knows that it is short term because the bank always reserves the right to change deposit rates without telling the customer, so you go and change it. When you don’t want any more high cost money, you change it. 
But the beauty of CASA is that there is a percentage that behaves like a long-term fixed deposit. Say if you have Rs.100 million in CASA, there’s around Rs.30-40 million that is always static. Some banks take that as medium to long-term funds and use them for matching purposes. Those are the customers who have more than that account relationship with the bank. They have their salary coming to that bank and their personal loans.

The budget had a proposal on lending to specific industry groups and geographical locations and the monitoring starts in July. How are you doing so far?
The idea there is there are underserved segments where the Central Bank wants us to invest in. That is why a lot of rules are there. But we are meeting the agriculture quota. Other quotas, we only have internal limits until we see what the Central Bank wants us to do. If you look geographically, the Western Province has everything – foreign investment, local investment. By nature it is like that. I saw in 2009-2010, Jaffna getting huge investments but it died down. In this country there was a lot of talk on the Eastern Belt but it didn’t work out that way. The lifestyle of the people is basically the same there. I remember once former Central Bank Deputy Governor Ranee Jayamaha gave the approval to open 60 new branches in one go, for all the banks, in the North and East. Then a lot of banks went and opened branches but now we feel the lending is not mainly for the development side but for the consumption, gold loans. That is the issue there. When I was working at another bank, I noticed that in the North and East, 80 percent of the lending was on gold. You can’t develop. Now in Jaffna you find hotel complexes coming up. Nothing much anyway.

Your bank hasn’t paid much dividends in the past 10 years. Will this change?
The board wants to consolidate the bank’s position before paying dividends. Most banks at the initial stages did that. You’re right. We have been in the business for 20 years and we haven’t paid sufficient dividends. That’s not good.

Is this because of capital requirements?
Yes, our priority is to strengthen the bank. Then most profits will go into building the capital. The board wasn’t unhappy with it. The board actually encouraged us to capitalize the profits.
Finally, on the bond controversy, a Central Bank report said that PABC may have had a role to play in buying these bonds and dumping them to the state.
I have to clarify this. PABC has never violated any of the regulations. We haven’t. The regulator picked up some items they thought irregular and wanted our explanations, which we gave. I don’t think the bank has violated any regulatory requirements. I’m very confident about it. I sat down with them when the Central Bank went through each item. The Central Bank has the right to ask because if any bank has violated and is connected to the bond scam, they have to be punished. There is no second thought.
I asked because the Central Bank report mentioned PABC.
Yes, because it’s not really, I mean we have dealt in the bond market with this well-known company and the government institution and we haven’t done anything off the market or any private profiting. We haven’t done anything like that; nothing outside the Central Bank regulations.
What was odd was that in some instances you had bought from the company and sold back to the same company, on the same day sometime.
I think, since I have already replied to the Central Bank, I shouldn’t say anything in public.

So the Central Bank was happy with your responses?
Well, I don’t know, they have to get back to us. But we have made our submissions.

Was this recently?
Just about a week ago. We responded open-heartedly. We have nothing to hide. You can’t hide anyway. Everything will come out. This is a very transparent country. There’s ways of finding things. So we don’t want to hide things. If the Central Bank thinks we have done something wrong, let them come and tell us and we will respond to that.