Finance sector is at the heart of restarting Sri Lanka, asserts People’s Bank Chairman

In any country and in any instance, the heart that sustains the economy is the banking and finance sector. This industry is responsible for keeping the economy alive in times of crisis and also to restart the economy after this period of crisis has passed. Here, we take an in depth look at the finance industry and see how it has handled the pandemic period and how it plans to handle the way forward. 

The banking and finance sector is considered the lifeline of a country’s economy and one of the best people to talk to regarding this is none other than People’s Bank Chairman Sujeewa Rajapaksa. 

Rajapaksa is a Managing Partner of BDO Partners, the local representatives of BDO, the fifth largest accounting network in the world. He is a fellow of the Institute of Chartered Accountants of Sri Lanka (ICASL) and a fellow of the Institute of Certified Management Accountants of Sri Lanka (CMA). He holds a Masters of Business Administration from the Postgraduate Institute of Management of the University of Sri Jayewardenepura. 

During his professional career that has spanned nearly four decades, he held the honorary positions of President, Vice President and Council member of the ICASL. He was the former Chairman of the Auditing Standards Committee of ICASL and President of Practicing Accountants Forum of Sri Lanka. He was the Treasurer of Sri Lanka Cricket and the Treasurer for the Cricket World Cup in 2011. He was a Board Member and Technical Advisor to South Asian Federation of Accountants (SAFA) as well as the Technical Advisor to Confederation of Asia Pacific Accountants (CAPA). 

He has also served in the directorates of National Development Bank PLC (NDB), NDB Capital Ltd., Bangladesh and the Finance Company PLC. At present he serves as the Chairman of People’s Bank, Chairman of People’s Leasing & Finance PLC, an Independent Non-Executive Director of Haycarb PLC, Dipped Products PLC, Hayleys Agriculture Holdings Ltd., Uni-Dil Packaging Solutions Ltd., and as the Deputy Chairman of Softlogic Life Insurance PLC. 

Following are excerpts of an interview:

Q:  Obviously the banking and finance industry is the lifeline of an economy. Seeing as it is actually the heart that pumps the blood into the country’s life, how has this pandemic affected the finance sector? 

What you need to understand is that when there is any catastrophe, whether it’s in Sri Lanka, or any other developing country or even a developed country, the banking and finance industry is the most important industry. Liquidity or cash is the key in any economy. So when there is a pandemic like COVID, we need to understand that there’s a huge issue of limited liquidity flowing into the economy. This is where the finance or banking industry plays a key role.

If you really look at the banking industry in Sri Lanka, especially People’s Bank, we have a strong footing. With any bank, you need to have a very strong capital base. People’s Bank issued Rs. 20 billion debentures and these were grabbed up by a few investors within four hours, making it the highest ever in Sri Lanka. That means that our market is liquid. As a result, People’s Bank has been able to increase its capital base, which we call Basel III. Basel is an international organisation that considers risk factors, leverage and many more. In our bank, we have a solid footing like many other banks in Sri Lanka because of the Basel III requirements. 

The pandemic hit Sri Lanka quite suddenly. Sri Lanka being basically an export-oriented economy was dependent on a few sectors, especially the apparel industry, leisure industry and the migrant workers who work abroad, remitting a lot of money. These sectors are very vulnerable in any economy but in Sri Lanka they are absolutely important to us. 

The apparel industry alone generates about $5 billion of income. So when the economy went into lockdown, the members of the apparel industry could not export their products which had been produced here. In addition, they could not collect their dues of around $ 500 million from the products that had already been exported. Furthermore, the imports of raw materials that had been placed could not be brought in. 

Considering the leisure sector, within a day, everything came to a standstill. So as a result, a large amount of money could not be brought into Sri Lanka and could not be circulated in the economy. 

Q:  The responsibility of managing such a situation primarily sits with the finance sector; how was this situation faced?

The finance sector being a highly-regulated industry together with the President, Prime Minister and all relevant officers, through Central Bank, decided to give some kind of blood, immediate blood, to the economy. They did this by providing liquid support, in the form of moratoriums. They gave working capital loans which are absolutely important. 

Furthermore, there are certain technical things that happen in the financial industry, because every commercial bank is required to keep a percentage of your fixed deposit with the Central Bank. So say for instance that it was 6%, if you take a Rs. 100 deposit, of the Rs. 100 you have to keep Rs. 6 with the Central Bank where the banker doesn’t get any income by way of interest for that deposit. It’s interest free. So, the Central Bank first released 2%. In other words, this is called SRR – Statutory Reserve Ratio. Later they released another 2%, thereby ensuring cash flow within the economy. 

Secondly, the moratoriums meant that for the next six months customers had no need to worry about loan and credit card repayments. So by doing that everybody was very comfortable with having liquidity in their hands. This facility was given to all across the board, whether corporate or private sector and all individuals. 

Q:  People are not making money but want loans that they might not be able to repay, which puts banks at risk. In your opinion, did all banks, including private banks, actually adhere to these stipulations? Were the people actually happy with it and, if not, why?

People’s Bank being a State-owned bank has a different focus because its shareholder is the State. Alternatively, if you take a private bank, its shareholder is not the State. While the Government has a stake of about 30-35% in most of the private commercial banks, the remainder is held by outsiders, and their expectation is different. What they expect is mainly dividends and increase in value per share. Where State banks are concerned, the Government categorically stated that customer needs have to come first. 

Obviously there are certain differences when comparing State banks and private banks because State banks went pell-mell and gave all the comforts from day one. On the other hand, private banks have to draw a very thin line between shareholder expectations and customer expectations. So there is a kind of clash between these two. Therefore, some of the banks could not immediately get on board with this as they had many factors to consider. 

In the meantime, at this moment, as bankers, we need to understand the country’s balance sheet, not individual balance sheets. At the end of the day, we need to have customers to sustain. Also we don’t have large amounts of capital with us because we get depositors’ money, which we lend. In every bank, their shareholders would have contributed only 10% of the capital. The 90% comes from depositors. Therefore, everyone needs to understand that there is a huge risk and the bankers have to make sure that we pay our depositors back on time. 

Q:  During the pandemic there were instances where people were not allowed to withdraw their Fixed Deposits before maturity, but on the positive side people were granted loan extensions. In your perspective, what is the objective of the Government and the finance sector in adopting this stance? Is there a strategy behind this? Is it towards something positive? 

People’s Bank, being the bank of the people, has never restricted anybody from withdrawing money. If you have a deposit and have entered into a certain term, whether it is one month or three months or one year, once it has matured, you can surrender your certificate and get the deposit back, including your accumulated interest. In the event that you want to withdraw that prematurely, still there is a possibility. 

There are, however, two types of institutions in the market; ones that are registered with the Central Bank and those that operate below the radar. The latter are basically not registered with the Central Bank, which is something people should be concerned about. There is no question about not paying your deposits and things like that. There may be some issues, but generally, across the board, all the banks even financial companies in this country honoured their payment. 

Q:  How was the process during the pandemic?‍

 If there were requests for advances, I believe certain limitations came into play. But where the deposits are concerned, it’s a prime responsibility of a banker or a financial institution to make sure that you get paid whenever it has matured or even before. 

If you want to develop the economy of any country, you need to have a very low interest regime. Sri Lanka has been having 16%, 20% to 25% interest rates for loans. You simply can’t sustain because when you’re going to take a loan at the rate you have to include that interest cost into the product or service that you provide. But Sri Lanka also looks at exports, at overseas markets. So can you compete in the export market? That is where the present Government seriously thought about having the single digit interest rate. Therefore, at present banks have multiple loan schemes now less than 10% through the ‘Saubhagya Dekma’ program – to have a single digit regime.

Q: Is maintaining a single digit rate a factor in a normal situation or is it especially for rebuilding after a pandemic?

 There is a perception even among bankers that they need to have the highest interest rate, but now everyone has brought it down to around 10% or less than 10% or it could be maximum 11%. Therefore, this will continue irrespective of the pandemic. The important thing is that whoever is going to borrow funds will have a varying concession rate where the cost of production of your product or your services will be very competitive. 

There is a difference between the interest rates in a loan and a deposit. We also know that there is a large group of people who have already contributed to the country and are now retired. Most of them don’t have any other income, except for the interest from their savings. This interest is therefore crucial for them, especially for expenses like medicine. But we should also understand that we have to support the industries to be competitive in the market, especially at present, so that we can also reduce the cost of living. 

In addition, we should also change our lifestyle, we have to seek local products whenever we can. We need to promote local industries, which will definitely have an impact on the cost of living. Agencies like the Consumer Affairs Authority will have to monitor if the incentive given by banks is given to the customers in return by businesses, by reducing their cost of production or cost of service.

Q:  As much as all this is promising, we see the smaller industries, micro- or medium-scale industries, still struggling. What is the way forward for them from the banking perspective? 

If we look at SMEs, People’s Bank introduced several loan schemes, like ‘Aswenna,’ with low interest rates. We give it to agriculture, poultry and fisheries sectors. We gave moratoriums to bus owners, because they had no income during lockdown. 

But at the same time, customers also should understand how the banking process works. A lot of people have the impression that if they go to the bank, they are entitled to receive what they ask for. However, if you have defaulted any of your loans, if you have not seen your banker for so many months, then the first impression of the banker towards you will be very different. The right kind of engagement and interaction with your banker is absolutely important. 

Q:  We have previously discussed the IDB’s role in getting this sector groomed and partnering with People’s Bank. ‘Restart Sri Lanka’ by SLIM is also focusing its efforts into restarting SMEs and helping them build up. So do you see your partnership with IDB and ‘Restart Sri Lanka’ in moving forward?

 Up until now, Government institutions have been working in silos. Now there is a greater collaboration – IDB, People’s Bank and ‘Restart Sri Lanka’. IDB is going to provide everything to the prospective investor; all their feasibility studies, project reports and so on, free of charge. With that, they will come to the bank and we will look at the documents and within a few days they can extend the facility. So ‘Restart Sri Lanka’ will also come and help with facilitation. This is the way forward – all industries coming together and working with synergy.