A lifeline for economy amid crisis: Have banks done enough?

Businesses and individuals continue to struggle due to the impacts brought about by the global health crisis and it was the banking sector that all industries turned to, for help.

In addition to the sector’s own share of problems, the banking fraternity was expected to set up its efforts and play a key role in mobilisation and allocation of funds.

Considered the backbone of the economy, it carries the responsibility of providing and facilitating the necessary relief and stimulus to move forward.

Mirror Business recently sat down with Sri Lanka Banks’ Association (SLBA) Chairman Dimantha Seneviratne, who pointed out that the task bestowed upon the industry was easier said than done.

Following are the excerpts from the interview.

The pandemic brought about an unexpected turn to the economy, where the impacts spilled over to the banking sector. How well did the banking sector step up to address the challenges?
Timing was indeed unfortunate when the pandemic surfaced; 2020 was expected to be a turnaround year, coming on the two years of lacklustre economic performance hobbled by political instability and then the Easter attacks. 

However, I must say the banks were quick to respond to the immediate needs with the onset of the pandemic. The first was to ensure that the financial sector is not compromised by any contagion; banks implemented split shifts, put staff on roasters and operated out of multiple locations to ensure continuity as well as safety of the staff members. 

Next was to make sure that money circulation continues; the bank branches were opened, whilst ensuring the safety of the staff. With the lockdowns coming into effect, the banks put in place mobile banking solutions and mobile ATMs in a coordinated manner to take the bank to the people. 

Further, the banks encouraged the customers to use digital channels for transactions, even to the extent of tying up with other vendors to provide value-added solutions. 

When we spoke to a number of industries, they said that there is a delay in the disbursement process of the COVID-19 stimulus package. Why was that so, given that it was evident that these industries were struggling to stay afloat?
We must bear in mind this was a regulator-driven stimulus. As such, the banks have to follow the regulations laid down by the Central Bank. This required the customers, who met certain criteria, to apply for such relief. These applications then had to be vetted and approved by the regulator. 

As you can see, the process was cumbersome, involving multiple areas of vetting, which predictably led to delays and the other issue was the banks and regulator were not working with full force due to COVID contagion risk, which was addressed only around mid-May. 

However, now, some of the bottlenecks have been removed, with the banks approving the credits themselves. The relief is reaching the recipients expeditiously. 

The banks were asked to accommodate debt moratoriums for a period of six months for businesses and individuals and working capital loans for eligible customers at 4.0 percent interest rate, with interest payments waived off for six months. What implications did this bring about?
While this was the need of the moment and a timely move by the Central Bank, the way the debt moratorium was structured earlier would have seriously impeded the banking and NBFI sectors. The impact on capital would have significantly reduced the sectors’ ability to support credit growth, if the initial recommendations were to be implemented. The banking industry had to highlight this and the SLBA had several rounds of meetings with the regulator to allow the banks to charge at least 7 percent during the moratorium period, to be collected at the end of the loan. 

While the debt moratorium was available only for the client meeting certain criteria, the banks have on their own accord extended this relief to other deserving customers to help them tide over these difficult times. 

Further, it should be noted that the debt moratorium, in the current form, is for a maximum of six months. We feel that there will be certain industry sectors, which might need longer to get back on their feet; tourism is a case in point for those we need to consider larger financing terms.

The refinancing scheme, where in the customers could borrow at 4 percent from banks, that will then be refinanced by the Central Bank at one percent, was only open to the customers meeting certain criteria. 

The initial refinancing was for Rs.50 billion, which was then increased to Rs.150 billion. This was a timely intervention by the Central Bank, since access to cheap liquidity is what the industries need right now, to stay afloat till the markets revive.

In addition to the increase of the Saubhagya Refinance Scheme up to Rs.150 billion, the Central Bank also introduced the Credit Guarantee Scheme that the SLBA was also lobbying for. I think, with the Credit Guarantee arrangement, the banks would be able to disburse the funds in a more efficient manner.

Following the lockdown and having to extend the necessary support to the business community, what is the status of the capital conservation buffers that were mandated to be built up as part of the Basel III capital rules, given that the Monetary Board allowed the banks to draw from these buffers during the crisis?
The capital conservation buffers are actually meant to be used at times like this. However, this relaxation is only a level of comfort. Thus far, no bank has yet dipped into these conservation buffers and remain adequately capitalised. 

However, as we move forward, based on how best the impacted customers could recover, some banks may be compelled to use some of these buffers. It is too early to comment. 
Also, the capital conservation buffers are over and above the minimum Basel III capital requirements. Hence, the banks continue to be in line with the Basel III regulations.

Having witnessed how businesses were impacted with this sudden shock that shook the world, what better measures could businesses have taken to strengthen their financial stance?
It is an old adage that cash is king. Those companies that had sufficient liquidity and cash buffers will weather this crisis better than others. Strong financial management, including cash flow management and lean processes are the need of the future. 

Diversified businesses, diversified supply chains, localised production and supply chains are some of the options the businesses should take into consideration. However, whatever precautions that could have been taken, it’s difficult to get through a shock of this magnitude for most companies.

What were the measures taken by the banking sector to realign to what we call now the new normal?
We feel that the ‘new’ normal will be wider adaptation of digital technologies, not only in banking but across multiple industries, including education and industries such as agriculture, which usually don’t figure when one talks about digital. 

Hence, the banking sector should be cognisant of these developments. In the banking sector, we might see a fall in real estate footprint, as the branches shrink in size and number, to be replaced by digital channels, ATMs and CRMs. With the introduction of payment solutions such as QR codes, we will see this reduction hastened. 

The banks will look to increase their return on investment (ROI) through the digital infrastructure investments they have made to date, which cover back office operations in addition to customer touch points. 

With the industry and the global supply chains disrupted to the extent that the new ones may be quite different to what they were. Hence, the banks will also have to realign themselves to ensure they are able to accommodate new countries, correspondent banks, etc. The drive towards digital interactions has elevated cyber risk, which will be an area of focus for financial institutions, as we move forward.

On embracing the digital infrastructure available to move towards a cashless economy, it is observed that other than the basic tools, banks have been slow in adapting to the latest trends, despite the availability. Why is that so? 
Investment in digital infrastructure is an extremely capital-intensive proposition. While most banks had done this, there wasn’t a clear return on investment advantage with slow consumer adaptation. 

Further, the fragmented approach to such things as QR codes was not conducive till LankaQR was introduced. The government now has a clear road map to develop the digital capability and drive a less cash society. 

One also has to take into consideration that these digital solutions are largely smartphone driven and the smartphone penetration is limited, especially outside the Western province. There is still a large customer base whose preferred banking channel is branch banking, especially outside the Western province. 

An area which should be taken into consideration when driving these strategies is that Sri Lanka has an ageing population. Hence, the phasing in of digital solutions and digital adaptation will take time.

Is the banking sector satisfied with the current environment it is operating in? What can be done to make the operative environment more conducive?
The current operating environment is impacted by various factors other than the crisis we are facing. The interpretation, misinterpretation of circulars and directions by various sectors of society, the generalisation of certain events and the expectations of clients, make it very challenging.

The banks are a critical component in the functioning of the economy. The banks are lending out the depositors’ money and therefore, have a fiduciary responsibility to ensure it safety. Any sentiment that will jeopardise the robustness of the financial sector will be disastrous to the economy. I feel that the media can play a big role in this through clear, transparent and complete reporting. 

Generalising facts and painting everybody with the same brush puts the economy at risk. The government should encourage people with the ability to repay loans to do so. This will help strengthen the banking sector by putting them on the right footing to revitalise the economy. 

What is the short, medium and long-term outlook for the banking sector?
At the outset, I need to say that the Sri Lankan banking sector is well capitalised. Further attraction of funds was not impacted by the current crisis. However, the short to medium term is not going to be a walk in the park. During this period, the bankers need to have a very high level of engagement with the customers to help and guide them through these challenges. 

We should see limited credit growth, resulting in high levels of liquidity in the banking sector. The interest rates, I feel, will remain low in the short to medium term, which will result in tighter interest margins that should facilitate credit growth as the industry picks up.

On the other hand, the environment is conducive for mergers and acquisitions in the financial services sector and I would be surprised if we don’t see at least a couple of such transactions. 

In the long term, with the economy bouncing back and the efficiencies created by streamlined operations and digital distribution channels, we should see a significant improvement in return on capital ratios.