• Banks are doing what they can to cope with the slow growth the country has experienced due to political uncertainty, global factors and other internal challenges
• High taxation has weakened the banking sector at a time when investments in IT and infrastructure are necessary
• Opportunities for growth are on the horizon for Sri Lanka, especially with its competent workforce and the deals it has signed with other countries

Dimantha Seneviratne has nearly three decades of experience in the banking sector. Prior to his position at Sri Lanka’s National Development Bank (NDB), he was director and CEO of Pan Asia Banking Corporation PLC (PABC). 

He also held senior management positions at HSBC Group, Overseas Trust Bank and Sampath Bank. Seneviratne holds an MBA from the University of Sri Jayawardenapura.

In this interview with Emmanuel Daniel, Seneviratne talks about the overall situation in Sri Lanka, the direction the country is heading, and the challenges as well as opportunities along the way.

Emmanuel Daniel (ED): Very pleased to be able to speak with you, Mr. Dimantha Seneviratne, the chief executive of NDB (National Development Bank), one of the larger banks in Sri Lanka, and maybe a very strong indicator of the state of the economy.

It has not been an easy year for the Sri Lankan banking community. Both the banks as well as the economy in general have been trying to find that engine for re-establishing growth, at the same time, fighting off inflation, fighting off borrowing costs – some of the macroeconomic challenges that the country has, which the banking industry has been carrying, basically.

Where is Sri Lanka right now? Because if you don't look at the balance sheet, this is a pretty promising country. In terms of skill sets, in terms of natural endowment, in terms of infrastructure, it's got some things going for it. How would you describe the Sri Lankan scenario at the moment?

Dimantha Seneviratne (DS): Right now, we’re in quite a challenging situation if you look at the economy. The last two years, if I may talk about 2017 and 18, the economy grew by around 3%, compared to the growth rate that we had around 5.5 to 6% five years back, even during the height of the civil war. Getting adjusted to that level of low growth scenario is one challenge that the industry is faced with.

If I may talk about the banking industry that we have at present, as chairman of the Sri Lanka Banks’ Association. Over the last few years, the banking industry was growing at a rate of about 15%. But this year’s first half, there’s no growth scenario or it’s mostly negative growth. It's the culmination of several factors, I would say.

One is the political uncertainty that unfortunately, we have been facing over the last one and a half years since early 2018. The uncertainty that has come, plus even recent unfortunate events in terms of the April incident. The low growth scenario and the global situation also didn't help. All that (led to the) culmination of everything together, so that is why it's a bit of a challenging situation.

The banking industry is also facing (its own) challenges. One is the Basel III (Regulations), which was implemented in Sri Lanka in 2019, so that means a higher capital requirement. On top of that, the IFRS 9 accounting terms were also introduced, so that means you're switching to that thinking, and also higher provisioning, impairment costs that are coming up, classifying your portfolio into three different buckets, and then impair for the full lifecycle in some of distressed loans and all. That’s, again, another challenge that the industry’s faced with.

Historically, banks have been one of the industries that have been earning or showing good returns. But in difficult years, the policymakers also wanted to ensure their funding, so they had to get from the banks. We’ve been showing some good results, so it's easier to tap to the banking sector to get some more tax. We were also introduced another tax last year, called debt service levy (debt repayment levy), which is also 7% on the top line.           

All of the tax burden right now in the banking industry is about between 55 to 57%, I would say it’s one of the highest taxed industries. All these are coming together and then the low growth scenario are all challenges that we are currently faced with. As CEOs, we are trying to cope with these challenges.

On the other side, there are a lot of positives as well. The country has so much potential: the literacy rate, the people are quite agile and quite sound in their analytical capabilities, a lot of exposure to industries that we have, the deals that we have signed and are to be signed are creating a lot of opportunities for Sri Lanka, the geographical location that we have. We have the GSP+ (Generalised Scheme of Preferences Plus) arrangement that we have with the European Union. The United States is one of the major buyers of our garment and then there’s global development, the US-China trade war. Those are creating opportunities for the country, for us to capitalise on those. We see there are opportunities coming.

ED: Would you say that the banking industry gets taxed very heavily in Sri Lanka partly because it is one of the few industries which constituted very clearly and it's already a pillar of the economy? It's easy to go into taxing the banking industry, that there is no large corporate, there are no conglomerates in other industries, which can be taxed like the banking industry, what do you think?

DS: Yes, it's quite straightforward when it comes to the banking industry. The industry is highly regulated. If you go and have that for large corporates, there may be ways of other tax efficient manners that the corporates can play around with, manufacturing or probably different subsidiary levels. Whereas the banking sector is regularised and is straightforward. Apply tax, one on the profit before tax level after expenses and another one on the top line. There are two tax elements. This is one of the easier places to get tax income in your hand.

But on the other side, that's weakening the industry. This is the lifeblood of the economy. Too much of tax, naturally, is going to weaken (the industry), and this is a time that the industry also needs to make investments in infrastructure, investments in IT and platforms. With so many challenges, with what has been taxed and with what is available, and to justify a meaningful return for the shareholders, we have to attract capital. That is rather timing-wise, whether we can bear that for that long.

ED: How has the banking industry been responding to these challenges? Where do you raise your capital? What have you been doing on the profitability front? And what have you been doing on the non-performing loans front? What have the institutions been doing generally, to reduce the pressure on all these fronts?

DS: Banks are trying to be more efficient. The cost-income ratio has been one of the key areas; we are trying to minimise costs. That's why the digital channels, the investment on those platforms, should reduce the cost of going to the market. So, one area is managing your cost aspect.

The other one is finally looking at the pricing and the margins, where are you going to get that margin? Naturally, there's a minimum margin that one should look at, and some banks move to the RORAC-based pricing, the return on restricted capital, and try to price their assets.

In that case, the challenge is whether they are relevant sectors that the economy should concentrate on, so there is a cost as well. To preserve your capital and to preserve a certain level of profitability, banks may not go into some sectors. That is one challenge.

ED: Is the banking industry is disciplined in that way? Because in other countries, agriculture isn't something that you can escape from, and serving some of the large, local corporates, and stuff like that. But do Sri Lankan banks have the discipline and opportunity to select what they need to focus on?

DS: In the case of agriculture, there is a regulatory-driven exposure requirement, a minimum 10% of exposure should be to the agriculture-related industries. Except for that, there are no regulatory-driven caps introduced for certain industries. So that way, banks are free to choose where they're going to (invest). But that said, the banks also have to be responsible for the general public.

Right now, about 80 to 85% of total population is banked, so there’s about 15% minimum unbanked population as well. These are the elements that we should also bring into the banking stream. When you're concerned with certain capital requirements, that (move) might get a bit delayed, unless you use some digital platform to get them in.

ED: The interesting thing is that when I try to piece together the Sri Lankan situation, capital cost is one of them, but what about non-bank financial institutions? What about markets? How well developed are markets to take some of the pressure off traditional bank lending?

DS: We have a robust non-bank financial market as well. But the thing is, it's quite congested, I would say. There are more than 40 plus non-bank financial institutions as well. That is all scattered around. There are some strong, well-managed entities, but there are a lot more trying to stay afloat. They're also facing the brunt of this economic downturn. And if you look at the NPR ratio, it’s much higher than the banking industry.

ED: But the banking industry’s NPR ratio is quite high.

DS: Right now, the official numbers that are published are around 4.8%. Last year, that was around 2.8%. So it has come to that level over one year. That shows quite a huge stress in the market, especially in the SME sector. But we have seen much higher NPR ratios in the past, even 7 to 8% industry averages in the past. These are cycles that we have gone through.

How will we manage this cycle? That’s where the political stability that we are expecting in a few months’ time should help for people to also invest. Right now there's some uncertainty, so the investments are not taking place. But I think we should be able to come out on top because other than NPR ratio, other fundamentals are strong in the country. If you take the banking industry, the liquidity levels are there, the capital levels are quite good; well-capitalised, good liquidity ratio.

ED: Am I right to say that the central bank, the system’s emphasis on capital has not affected the banking industry, in that you still can look for cheap capital or strategic capital? That you don't have to go back to the market every time, for most listed banks. And that the excess to the capital and credit is quite healthy.

DS: No, I think raising capital is now a challenge. Because if you look at the industry ROE, return on equity has come down to around 12% now. This was as high as 16 to 17% two years ago. So when the ROE’s fell and then on the other side, the high tax rates are coming in. Any investor would also look at what's my return on investment and when am I going to stop? Because there are capital requirements also coming in the moment a bank gets upgraded to a domestic systematically important bank – higher capital requirements.

Naturally, the capital is ongoing. That is where our challenge is, but there are other instruments like the tier-two or tier-three level capital that the banks are working on. Most of the banks have used those avenues to raise capital.

So far, the capital market is also active. Whenever a bank goes for a capital raising activity, we have seen a lot of subscriptions, interest coming in.

ED: Where are some of these subscriptions coming from? Is a lot of it from China or a lot of it is from the US? What we get a sense of is that the US is increasingly disengaged from this region.

DS: In the case of debt capital, I don't think any other overseas investors are coming, except for very few foreign currency denominated that capital that was raised. Recent capital raising have been all in Sri Lankan rupee, and those have been invested by the local institutions – the provident fund, or even the insurance companies where their long-term investment requirements are there. We have not seen any foreign funding coming, but when it comes to equity, yes, there are foreign funds that come and are invested into banks’ equity.

ED: Foreign funds are even more conservative than bank investors in their own market, basically, because they are foreign, they have to take a position, and they need to stay on that position for about two years, before they can figure out what to do. How would you describe Sri Lanka as being similar or dissimilar with other small countries? What do you think needs to be done? What are some of the top priorities for Sri Lanka at the moment, in terms of job creation, industries to focus on?

DS: Previously, I was employed to a multinational bank and I had the privilege of working in different Asian countries. When you look at Sri Lanka and when you compare with some of those (other countries), the regulatory framework is very strong. If I may talk about banking regulations, we have a very strong regulator. And on the other side, the positives, if I may talk about the staff force, the people’s intellectual capacity and that can-do kind of attitude – very good attitude. These are trainable, English speaking, highly literate staff, so we are fortunate to have those. But one key problem, I would say, since the ending of the Civil War, we have been developing all these but the current political instability, I think that is a key issue that we are faced with.

Of course, the global economic downturn has aggravated this problem, but our own internal, political instability has created uncertainties in the investors’ mindset to take long-term investment views. We know a lot of customers of ours who are holding on to their investment plans, waiting for some stability that they’re expecting, so that is one key issue that we are faced with.

Also, over the years, we’ve had these government changes, we have seen policy shifts as well. That is not good for a developing country. We need to have one set of policies running for some long period.

ED: How hopeful are you that the working relationship between the executive and, say, the central bank, or even the Banking Association evolves into a healthy ecosystem of constant consultation, constant problem solving together?

DS: Yes, I think that is quite healthy. The Sri Lanka Banks’ Association also has a forum to deliberate things, especially when, right now, they're on the verge of coming up with a new banking act. Naturally, there is a feedback session as well in formulating that. Whenever certain policy changes are made, they make it a point to consult us and get our views. It's a quite a healthy dialogue that’s happening.

ED: That's very good. Finally, this is just basically a question about digital and the fintech community. Are you happy with the way in which they interact with the banking community or could that be better? What are some of the mistakes that they do at the moment?

DS: The communication can be better, I’d say, because you need to have a form to work with their models that the fintechs are coming up. You need to have a more inclusive kind of strategy for the fintechs as well to work with the banks, because banks are still able to reach the masses. If I may talk about, in my case, the bank that I represent, National NDB Bank, we have a lot of tie-ups with fintech development and that’s not just a commercial level tie-up, more like a partnership where we work together in developing products and platforms. There are very good Sri Lankan originated fintech companies. We’re amazed with their analytical skills and their ability to produce some good platforms to suit our requirements. Our requirements are based on customer requirements. I think more collaboration is the way forward.

ED: Thank you very much.

DS: Thank you.