Building resilient, digitally vibrant SMEs key to unleashing growth potential

Sri Lanka’s economy is showing early signs of a recovery, yet significant challenges lay ahead. In that context, the performance of the banking sector tends to provide useful insights into what is around the corner for the wider economy. Spearheading an ambitious vision to drive a paradigm shift in the way that Sri Lankan bank, HNB occupies a unique place in the domestic economy, with extensive experience and expertise in key growth areas like the Small-Medium Enterprise and retail sector. 

Fresh from achieving another remarkable personal and professional milestone in the form of the Asian Banker CEO Leadership Achievement Award, together with his organisation being awarded Best Managed Bank in Sri Lanka while HNB also being recognised as the ‘Best Bank in Sri Lanka’ by the Euromoney, HNB Managing Director/CEO, Jonathan Alles, shared a few insights on current and future challenges and opportunities for the banking industry, and their impact on the domestic economy. Following are excerpts: 

 

Q: What are some of the most pressing challenges facing the banking sector today?

A: A key challenge that is faced by the industry as well as the nation as a whole, is the slowdown in economic growth experienced by the country. As an industry that underpins economic growth, by supporting institutions across a multiplicity of economic activities, the challenges faced by these entities reflect the performance of the banking sector. Following the tragic events that occurred in April the greatest challenge for the sector as well as the nation today is how we could revive our national economy and accelerate the pace of recovery.

The overall demand for credit has been subdued and the industry has seen a deterioration in asset quality over the past 12 months as a result of these stressed market conditions. This together with the SLFRS 9 accounting standards which came into effect from 2018, could result in higher impairment charges, impacting profitability across the banking sector.

Over the recent past, Sri Lanka’s banking industry has been subject to heavy taxation. The full effect of the Debt Repayment Levy – which comes into effect in 2019 – will further hamper industry earnings. This in turn would hinder internal capital generation, and constrain the capacity of the sector to fund viable business that would create employment opportunities and drive economic growth. Furthermore, in order to compensate for the low internal capital generation, the sector is compelled to raise more capital from the market to meet the stringent BASEL III regulations.

Q: At a national level, what can be done to resolve these issues?

A: At this point, there has been a lot about the post-April recovery that we can take encouragement from. Although tourist arrivals were decimated, they have shown very encouraging signs of recovery, albeit nowhere near the levels we were welcoming previously. In that regard, the key priority continues to be stability. We need to prove that Sri Lanka is safe – for our own people, as well as for visitors and investors.

Our country has gone through worse times and to rebuild our country it is extremely important that we set aside all our differences and rise as one nation to meet the need of the hour to build resilience at every level of the national economy, starting at the grassroots. Now more than ever, it is vital to ensure that we build confidence and create a conducive business environment.

Consistent and conducive economic policy is also fundamental to our continued recovery and taking adhoc measures without a long term view should be avoided. It is important in that regard to note that even at the start of 2019, foreign direct investment, and investments in general was sluggish.

Q: What can be done to improve the resilience of our SME sector?

A: This is an area which we are passionate about and I’m proud to say that HNB has developed substantial expertise. It is well understood that the SME sector is the engine of growth for our economy and for our part, HNB has served as a true partner in progress for innumerable SME and micro finance customers for many decades.

Crucially this has meant support during times of conflict, natural disasters, and low economic growth. We view the challenges we face today as being a kind of repetition of what we faced together with our customers over the past four decades. In that time, what we have learned is that protecting and supporting SME growth has been vital to improving the livelihoods and quality of life of generations of Sri Lankans.

Therefore, it is vital that we continue to do so today. For our part, HNB has been supporting the sector through loan reschedules, moratoriums and essentially by providing as much breathing room as possible to SME clients and especially those in the tourism sector who have been badly impacted over the last two months.

Q: How has HNB’s strategy and business model evolved over the recent past?

A: In 2013, when I took over as the Managing Director of HNB, the Bank as well as the sector was faced with a severe challenge that affected the profitability. HNB had a significant exposure to pawning business, that resulted in heavy provisions and write-offs due to the drop in global gold prices. In addition, the Bank’s productivity levels were low, with cost to income ratio being over 50% while the NPA levels were relatively high. The dedication and commitment of the entire Hatna family and our unwavering focus on resolving these critical issues, enabled the Bank to become the most profitable private sector banking group in the country by 2016.

Our core strength has been our ability to command a strong but balanced presence across key market segments – be it corporate, SME, retail or microfinance – and we take great pride in the excellence HNB has demonstrated across each of these fields. This fact is further endorsed by many accolades that we received from highly recognised international bodies during the last year, as the ‘Best’ in all business segments that we operate in.

Over the years, we have honed our expertise and knowledge in each of these areas and that approach is rooted very deeply in HNB’s ethos of ‘banking beyond transactions’. Stemming from this, one of our key differentiators has been our focus on deep rooted relationships paired with the development of new, engaging, and exciting products and services. In that regard, our ability to innovate has been drastically enhanced by HNB’s investments into cutting edge technologies.

This has led to a continuous drive to raise the bar, challenge the status quo and to enhance value created to all stakeholders. Accordingly, in 2018, we embarked upon a transformational journey that encompasses systems, process and people development. This journey will see significant investments towards upgrading technology and digital initiatives. The process of upgrading the core banking and loan origination systems have already commenced and would enable the Bank to offer superior value to our customers. 

Over the past five years, the Bank has taken several steps towards operational excellence, which has seen productivity improving to ‘best’ levels amongst peer banks. Under the transformation journey, the Bank is in the process of rolling out a branch operating model which optimises resources and returns amongst many other initiatives. With our staff being at the core of our business, the people transformation and enhancing the overall value proposition for our employees, forms a major part of our journey. 

In that regard, it is of course gratifying that we continue to receive local and international acclaim for our efforts, and are deeply humbled by the ‘Top Workplaces in Asia’ award by Asia Corporate Excellence & Sustainability Awards 2019, ‘Best Managed Bank in Sri Lanka’ award received from The Asian Banker and the ‘Best Bank in Sri Lanka’ award presented by Euromoney recently.

Q: What implications do you see arising from the rising tide of digital disruption for the banking sector?

A: Globally it is an interesting and increasingly volatile period for the banking industry. In both China and America, we are seeing the start of what appears to be significant encroachment on areas which have traditionally been confined purely to the banking sector. These include the rise in fin-tech companies offering Peer-to-Peer lending and online money markets that are presenting a growing challenge to established banks. Similarly, telcos are also encroaching on the transactional space, while digital payment platforms, and mobile wallets are changing the way that customers transact, and perhaps more importantly, the way that they think about transactions and capital itself.

In this regard, the launch of SOLO, the digital payment app powered by HNB is a significant step towards, reshaping the payment landscape in Sri Lanka. The app enables to make a payment to a SOLO merchant through any bank account or credit card. We plan to introduce many more features on SOLO in the near future.

Q: How is your business taking a more sustainable approach to the financial system?

A: We believe very passionately in the power of an integrated approach to business and sustainability. This is an approach that has been deeply internalised. It forms the core around which our business strategy has been woven. Utilising a triple bottom line approach HNB has delivered increasing value in terms of People, Planet and Profit.

HNB is a true pioneer in the SME and Micro Finance industry in Sri Lanka. Collectively the two segments account for close to 35% of the Bank’s loan book. The Micro Finance business in particular was first established during the height of the Southern insurgency three decades ago. On the other hand, HNB has been serving the SME sector for over 130 years, from its very inception. HNB therefore takes great pride in its efforts in this field which have been instrumental in uplifting livelihoods across geographies and across generations. HNB has similarly played a leading role in ensuring sustainable economic growth and a pipeline for Corporate Sri Lanka through countless partnerships with SMEs in their journey and graduation towards corporate status.

In 2014, we acquired HNB Finance which at the time was known as Prime Grameen. Since then we have worked to align HNB Finance’s strategy with our own, culminating in its rebranding last year. The company continues to record significant growth, and in addition to providing essential and affordable access to finance for numerous customers, HNB Finance has also actively supported over 300,000 female entrepreneurs at the grass root level to date – a remarkable achievement in its own right, and one which we aim to continue to enhance moving forward.

HNB has also continuously innovated in terms of our sustainable business strategy, developing award winning propositions such as ‘Value Chain Financing’ which creates economic linkages between Corporates and Micro Entrepreneurs. Adding more value to the Micro an SME segments, HNB has also partnered with sector experts, development finance and multilateral institutions to deliver financial literacy and capacity building programs.

The partnerships with multilateral institutions and development finance institutions extend far deeper into the business model, with HNB leveraging upon its stature and relationships to attract low cost funding.

These funds are in turn lent to sectors of national importance such as SME and infrastructure development covering renewable energy, water, sanitation facilities, etc., thus allowing HNB to make a profound, positive impact on the environment, while also improving the quality of life of numerous Sri Lankans. 

Additionally, we have also embarked quite successfully on a series of internal green initiatives including the introduction of a paperless office strategy and installation of significant roof-top solar energy capacity in order to enhance cost optimisation while further minimising our environmental impact.

Accounting for one of the largest CASA bases in the country, HNB plays an important role in inculcating the savings habit thereby contributing towards improving savings as a percentage of Sri Lanka’s GDP. HNB’s comprehensive and attractive value proposition to minors, ingrains the savings habit at a very young age.

Therefore, I would say that our business model has enjoyed the success it has because it has embedded sustainability into the business model itself.

Q: What is your outlook for the future? What growth initiatives can be expected in the medium to long term?

A: At a national level we at HNB are all confident that Sri Lanka can and will bounce back. This is inevitable, as the Sri Lankans cannot be held back. The speed and strength of recovery is the only question, and it will require prudent, compassionate, and objective policy and strategy from the Government and the private sector.

In terms of HNB’s own transformational journey, we stay committed to ensure that we enhance the value proposition for all our stakeholders. We will continue to refine our systems, streamline our processes, develop our staff and focus on digital to offer more choice and convenience to our customers. All of our efforts will be channelled towards ensuring that HNB is able to maintain and build on its role as a key contributor to growth, development and progress at every level of the Sri Lankan economy.

While being positive on the growth opportunities within the domestic market, we are open to prospects in overseas markets, subject to viability. Concurrently, from a Group perspective, Insurance and Investment Banking businesses will have more untapped capacity to grow in an expanding economy.

Leveraging on our expertise and the capacity built, HNB remains committed to play a pivotal role in the development journey of the country.