Key economic sectors’ resurgence to bring fresh challenges to banks

This is part of an interview series titled ‘Mirror Business S&P SL2 - Insights’ conducted in collaboration with the Colombo Stock Exchange (CSE). The interview features Hatton National Bank PLC Managing Director/CEO Jonathan Alles. Following are excerpts from the interview.

How has COVID-19 impacted the business operations of Hatton National Bank and how has the bank responded to these impacts?
With Sri Lanka moving into lockdown to flatten the curve on COVID, in March, our first priority was to ensure zero disruption in delivery of banking services to the entirety of our customer base. As such, the bank activated the business continuity plan with critical staff reporting to office. 

HNB’s aggressive emphasis on digitisation, technology development and information security, proved to be most valuable as the bank was able to rapidly institute work from home (WFH) measures to ensure smooth operations.

The social distancing protocols and especially lockdown due to the pandemic meant that there were few options available for customers to carry out their banking operations. Hence, one of our first moves was to bolster support and further streamline the process for customers, opening e-banking services for the first time.

Meanwhile, HNB Connect – our 24/7 contact centre operation, which was first consolidated in 2018 – was already fully geared to support our clients and this remarkable agility was a direct result of a technological transformation initiated by the bank few years ago.

‘‘Given the strong link between the banking sector and economy, the next 18 months will undoubtedly hold many challenges for the industry as a whole and would greatly depend on how rapid and resilient the resurgence of key economic sectors will be

In the weeks that followed, we recorded major surges in activity across all of HNB’s digital payment solutions such as a breakthrough mobile wallet, SOLO, our low-cost mobile card payments solution, MoMo and across the Internet Payment Gateway (IPG) solutions deployed throughout our merchant partner network. 

The bank also fast-tracked the roll out of AppiGo, a revolutionary platform, which enabled businesses to rapidly establish a fully-functional e-commerce presence, in order to cater to the unprecedented rise in demand for online retail and home-delivery services. Since launch in May, AppiGo had enabled over 70 businesses to establish e-commerce sites from scratch. While supporting digital transactions, the bank also assisted people in the curfew areas to carry out their banking transactions, by deploying mobile ATMs across 714 locations in the Colombo, Gampaha, Kalutara, Puttalam, Kandy and Jaffna districts.

In addition to the above, the bank’s focus has been on supporting customers who have been affected by the pandemic. Hence, during the lockdown period as well as after opening up, our credit teams have been fully engaged in providing necessary assistance to enable the customers to revive their businesses.

What is your assessment on how the banking industry will fare over the next 18 months and what challenges do you anticipate in the industry?
Given the strong link between the banking sector and economy, the next 18 months will undoubtedly hold many challenges for the industry as a whole and would greatly depend on how rapid and resilient the resurgence of key economic sectors will be.

In order to reinvigorate the economy that was at a near standstill, the Central Bank has been taking measures to relax monetary policy further. Policy rates have been reduced by 250 bps during the year while the statutory reserve ratio (SRR) has been reduced to a low of 2 percent, with a view to improve market liquidity. 

Despite interest rates being lowered, we believe that it would take time for credit growth to pick up as most of the businesses are currently focusing on working capital financing than expansion, given that the market sentiments and the business climate have not returned to normal as yet. Also the revival of some of the sectors such as tourism and exports would depend to a large extent on global conditions and recovery.

‘‘While we will continue our journey to become the most future-ready bank in the country, as always we will remain committed to partner the resurgence of our nation

The banking sector has been experiencing a deterioration in asset quality since the beginning of 2019, due to many factors such as adverse weather conditions that prevailed in the past, delay in payments in certain sectors as well as sluggish economic conditions. The effects of the pandemic could exert further pressure on the asset quality of the banking sector, as certain industries and businesses could take longer to recover.

Further, the banking sector has been actively engaged in supporting the customers who are affected by the unprecedented event, by providing moratoriums and working capital financing under the CBSL relief scheme. While HNB has always been in the forefront in providing assistance, the COVID moratorium scheme initiated by the Central Bank is the third such scheme since the Easter attacks last year. 

Despite the need to provide assistance to the affected parties in order to revitalise the economy, we believe that the impact of such continuous measures on the stability of the banking sector, which is the backbone of the economy, also needs to be considered. In this backdrop, the credit guarantees and interest subsidy scheme, announced by the Central Bank is a timely measure.

Given the nature of the pandemic and the possibility of an emergence of a second wave, the extent of impact to the economy and the banking sector would depend on the success of the measures taken by the government and the authorities in controlling the pandemic.

Is your business model resilient enough to recover from the impact of a crisis and manage potential crises in the future?
The bank has transitioned through all kinds of social, political and economic upheavals for over 130 years, including a three-decade-long conflict and more recently the tragic Easter attacks. Throughout HNB has stood strong and in support of all Sri Lankans.

Of course, the challenges we face today are unprecedented by any measure and there are temporary setbacks for the entire industry and the wider Sri Lankan economy, which are inevitable in the wake of the COVID-19 pandemic. 

The bank has stood the test of time over the years, by embracing change and focusing on opportunities for growth in times of adversity. With the outbreak of COVID-19, we reassessed our business and operating model and adapted the ‘new norm’ developed in alignment with the risks and opportunities in the operating environment.

Throughout the many cycles of volatility we have endured, HNB has been relentless in strengthening its risk management and governance frameworks and we therefore have utmost confidence, not only in our ability to be resilient in the face of this crisis but to also play a leading role in the recovery that will follow.

Could you elaborate a few growth prospects for the bank going forward and how you intend to capitalise on these growth opportunities?
Much has been made about ‘the new normal’ and we anticipate that almost all economic activity will be connected in some way to the concept of digitisation 
moving forward.

This was certainly true for HNB after the pandemic emerged and as I mentioned earlier, we have been driving our digital products and services within the social distancing guidelines. These efforts will only continue to accelerate in momentum in the weeks and months ahead. 

The bank is also in the process of implementing a multipurpose digital layer, which will enable the bank to launch digital products in collaboration with fintechs.

Furthermore, the import restrictions imposed by the government has opened up opportunities for substitutes produced within the country in diverse sectors and we are committed to support these businesses, given the importance of developing these industries for the resurgence of our economy. HNB, with its 252 customer centres spread across the country and with the expertise in supporting MSMEs, would be well positioned to capture these growth opportunities.

How is the bank responding to the credit relief announced by the government in the wake of COVID-19 and how much has the bank already lent out to SMEs?
We have been ramping up assistance to individuals and enterprises negatively impacted by the COVID-19 pandemic by granting debt moratoriums worth of approx Rs.350 billion to over 65,000 clients, across the entire spectrum of the bank’s portfolio, spanning corporate, micro, small and medium (MSME) and personal finance service (PFS) customers.

Working in alignment with government-led initiatives, we also facilitated a further Rs.9.5 billion in working capital loans at a concessionary interest rate of 4 percent per annum through the ‘Saubhagya COVID-19 Renaissance Facility’ and ‘Credit Guarantee and Interest Subsidy’ schemes introduced by the Central Bank of Sri Lanka.

In order to support MSMEs that were not eligible under the Saubhagya scheme of the Central Bank, HNB also set up its own COVID SME relief fund of Rs.5 billion to disburse loans at a concessionary interest of 8 percent p.a. for a period of up to two years.

Focusing on the shareholder, what efforts and initiatives are you taking to drive shareholder value amidst this pandemic and what is your message to the shareholders of Hatton National Bank PLC, especially in the context of COVID-19 and the way forward?
As always, our main objective is to ensure that we deliver sustainable returns to all our stakeholders. As I’ve mentioned earlier, one of our key success factors in the past has been our ability to weather challenges and ride periods of volatility. 

The bank adapted the ‘new norm’ couple of weeks into lockdown and within the current context, our key areas of focus are to ensure safety of all our stakeholders, maintain liquidity, improve asset quality, optimise costs, reskill, upskill and refit staff into new roles based on business priorities while ensuring the continuity of the transformation journey that we embarked upon two years ago, especially focusing on systems, processes and people. On the technology front, we are continuing with the upgrading of our core-banking and loan origination systems while strengthening system security and stability.

Recently, HNB was recognised as the highest ranked private commercial bank in Sri Lanka among the Banker Top 1,000 and secured an upward revision in its long-term issuer rating by two notches to AA+ (lka) by Fitch Ratings. We remain among the best capitalised banks in Sri Lanka and this strength in our balance sheet translates to stability in times of uncertainty and gives us the strength to continue adapting.

While we will continue our journey to become the most future-ready bank in the country, as always we will remain committed to partner the resurgence of our nation.