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The Leasing Council of Bankers of Sri Lanka (LCBSL) believes there is strong potential for progression, within the banking sector actively engaged in leasing, thus supporting the development of the country’s financial sector and the economy as a whole. LCBSL President Saman Kalansuriya in an exclusive interview with the Daily FT outlined some of the key objectives of the association, challenges and opportunities as well as regulatory requirements needed to uplift the leasing industry. Below are excerpts of the interview:
Q: Could you describe the Council and its progression since 2016?
The LCBSL is an umbrella organisation formed in May 2016, which comprises of the 15 Licensed Commercial Banks and Licensed Specialised Banks engaged in the finance leasing business. The members include Amana Bank Plc, Bank of Ceylon, Commercial Bank of Ceylon, DFCC Bank Plc, Hatton National Bank Plc, MCB Bank Ltd., National Development Bank Plc, Nations Trust Bank Plc, Pan Asia Banking Corporation Plc, Sampath Bank Plc, Seylan Bank Plc, Union Bank of Colombo Plc, HDFC Bank, Lankaputhra Development Bank Ltd. and Sanasa Development Bank Plc.
The objectives of the LCBSL are to maintain industry unity and strength, maintain uniformity and compliance, management of resources and professional competency.
The Executive Committee of the LCBSL is the governing council, comprising 12 representatives from member Banks. At the helm of the council is the President, who is elected from the governing council members. Three Vice Presidents are also elected from the governing council to manage the activities of LCBSL.
Despite not having a very long history, the LCBSL was successful in securing and supporting the leasing business of banks which was a major achievement in the recent past.
Q: What’s the general perception about the leasing industry?
Many people are of the view that leasing is a dying industry, but this perception needs to be corrected. According to the World Leasing Yearbook, global leasing volumes grew by 9.4% to $1,099.77 billion in 2016. If you were to take a look at the ranking of the global leasing market, the US tops the list with a share exceeding $ 250 billion and a market penetration of 30%, followed by China, the UK and Germany. The leasing industry has experienced significant growth and introduced new and innovative ways to finance equipment in the global landscape.
Taking a look at leasing in Sri Lanka, based on the only available data, in the year 2000 we ranked 45th out of 50 countries, with a 12.1% market penetration on GDP.
Q: What are the key challenges faced by the banking sector in leasing?
The major challenge faced by banks in Sri Lanka today is the non-availability of accurate data such as total outstanding, disbursements, etc. Accordingly our first task is to establish an effective database for banks.
We also observed that there is a huge knowledge gap in the leasing industry and our goal is to conduct awareness programs for employees engaged in the business. With many financial reporting standards being made mandatory, and the introduction of the new Inland Revenue Act with amendments to the leasing business, it is important to convince the Government officials and regulatory authorities on the benefits of leasing from a tax point of view.
According to the previous tax laws, capital allowances were available to lessors (banks and leasing companies), which was recently amended. With the previous system, pre-tax rates were reduced, considering tax shelter attributes of leasing business. However the new tax regime do not permit same which is a major challenge to the leasing business.
On the subject of pricing we are yet to witness a difference in pricing of finance products in the domestic market. In other countries leasing is competitively priced in comparison to various modes of financing. However volatile interest rates have always been a challenge in the Sri Lankan leasing industry.
The fixed tenure is the most attractive offering in a lease and the borrowers’ preference is to lock in at the lowest which does not happen all the time. When one has locked in at a higher interest rate, a reduction in rates can have an adverse impact on the borrower which could cascade down to the bank in turn.
Yet another challenge faced by banks in Sri Lanka is the changes in the impairment models, i.e. incurred loss model to expected loss model. Banks have to be prepared for losses we foresee which is a daunting task. In this scenario it is imperative that we have an effective data base in relation to all transactions.
Q: What are the key sectors banks cater to?
We mainly cater to the SMEs engaged in all three key sectors of the economy such as agriculture, industry and services. Lease financing has proven to be an important mode supporting the capital budgeting decisions of SMEs, especially in emerging economies where SMEs provide potential for strong growth and large employment opportunities. During the recent past, there has been much happening in the global leasing landscape as well with many countries implementing new laws and regulations to create a conducive environment for leasing business. Emerging countries have realised to better serve their SMEs with new developments in sustainable energy financing and agricultural sector financing.
Q: Has the increase in LTVs impacted your business?
LTV regulations are not new to the industry. As bankers we are used to having regulations imposed from time to time. In this instance there is a positive impact on our business as the credit risk has been mitigated, resulting in reducing the non-performing loans (NPL).
Initially, as with any new regulation, once introduced there is a lay back before acceptance. However, as time goes by the general public adjust to the new regulation — it is a physiological barrier.
Q: What is the total market size of the leasing industry in Sri Lanka at present?
In terms of outstanding or portfolios held by each institution, the total amounts to Rs. 800 billion as of 31 March 2018. The contribution from Licensed Commercial Banks and Licensed Specialised Banks engaged in leasing is around Rs. 300 billion amounting to approx. 35% to 40%. However, we believe if we take into account the lease execution figures or disbursements as we term it, the figure is much greater than the reported.
Q: What are the opportunities seen for 2019 and beyond?
We believe leasing has a lot of potential in providing financial assistance to sustainable energy projects as well as for all major infrastructure projects in Sri Lanka thus enabling the banks to actively participate in the development agenda of the Government. Despite bank growth and contribution to the national economic development, there has been limited evolution in the country’s leasing industry over the years. Therefore, the Council believes that there is strong potential for progression, with the banking sector playing an enabling role in propagating the use of emerging technologies and sophisticated transaction structures going forward. Establishment of an effective data base, addressing knowledge gaps in the industry, educating and convincing the Government and regulatory authorities, streamlining the valuers and product innovation are some of the main objectives of the Council for 2019.
Q: Could you elaborate on the contribution of leasing from banks to uplift the SME sector?
Unfortunately, we do not have an effective database for an accurate answer. In the year 2000 our market penetration was 12.1% to the GDP, which alone is evidence of the tremendous potential for growth in the industry. However, in order to enable this happening we require supportive policies, systems and awareness.
Q: How have banks managed their leasing NPLS?
We have been maintaining healthy portfolios in leasing business right throughout and it is pertinent to mention that leasing business has positively impacted the overall infection ratios of banks. In other words, the leasing infections in isolation has been well below the core banking infection ratios. Leasing business facilitates in reducing the risk profiles of our loan book.
Q: How has the use of technologies and evolution impacted the business?
Banks do have effective IT applications, however going forward there are required modifications needed for all IT systems. As in any other industry changes do happen and we too require customisation of certain regulatory requirements, which we find time consuming and challenging.
Q: Could you further elaborate on educating people engaged in the industry and why?
There are certain organisations which function in the absence of correct business models. There is a pressing need to educate existing staff as well as those new to the industry. A sound training is fundamental for all those working in the industry.
The Council can play a vital role in this aspects and is fully geared to impart knowledge and experience to staff as required. In fact we have commenced our knowledge sharing actives with the first successful program carried out in November 2018.
Going forward we planning to take this knowledge sharing session out to the masses as well. We want to grow into an area where we can impart knowledge through international symposiums.
Q: We have found certain companies engaged in leasing business failing in the recent past. Can you elaborate?
Creating a successful leasing business is not a simple task. Successful players are those who have implemented bespoke systems, procedures, work flows and internal controls.
The main factors contributing to the failed leasing businesses are: Decreased profitability due to pricing issues, i.e. Excessive sales promotion expenses and commission payments to brokers, without analysing the adverse impact to the pre-tax IRR, increased trend in non-performing accommodations and its adverse impact on gross yielding ratios, poor control of volatile liability dependency ratios coupled with issues in hedging mechanisms/maturity mismatch gaps in assets and liabilities and decreasing trend of liquid assets.
– Pix by Ruwan Walpola
