Sri Lanka’s banking sector is under orders to help the economy recover from the impact of last year’s terror attack and this year’s coronavirus crisis – and the government is signalling that obedience isn’t optional.
Following the terror attacks on churches and hotels in Colombo on Easter Sunday, 2019 – a series of bombings which killed more than 250 people – the government issued a moratorium on debt from tourism-related companies and from small and medium-sized enterprises.
That order was recently extended by a further six months to counter the effects of coronavirus on the economy. For those banks that don’t comply, beware. The government has clearly decided that some banks are not doing enough: Rasitha Gunawardana, chief executive of state-owned People’s Bank, and Senarath Bandara, his counterpart at Bank of Ceylon, were both ousted in early March.
At Bank of Ceylon, Sudath Gunasekara, the previous senior deputy general manager for international, treasury and investment, has taken the helm.For now, the government has installed interim leaders. Gunawardana was replaced by Bonniface Silva, previously senior deputy general manager for banking operations at People’s Bank.
Bank of Ceylon declined to comment on the leadership change. Neither Gunawardana nor Bandara could be reached for further comment after they left their respective banks.
They had given us a warning [at the end of February] that they were not happy with the way the banks were responding to their call- Ranjith Kodituwakku, People’s Bank
Gunawardana had worked at People’s Bank for more than 30 years, but was chief executive for less than 12 months. He took over from N Vasantha Kumar in April 2019, less than a week before the Easter Sunday attacks.
Ranjith Kodituwakku, deputy general manager of commercial banking and digitalization at People’s Bank, tells Asiamoney that Gunawardana’s departure from People’s Bank was amicable and points out that Gunawardana has been offered a consulting position with the ministry of finance.
But Kodituwakku adds that the government’s decision to oust the leaders of two of the country’s biggest banks did not come as a surprise.
“They had given us a warning [at the end of February] that they were not happy with the way the banks were responding to their call,” says Kodituwakku.
Stimulate the economy
In May 2019, a few weeks after the Easter Sunday attack, Sri Lanka approved a one-year moratorium on loans and interest payments for the tourism industry. In January 2020, the central bank issued guidelines for the debt freeze to be extended to SMEs, followed by the extension for another six months in March.
Eran Wickramaratne, who was the state minister for finance at the time, announced last May that working capital debt and interest would be treated as separate loans to be repaid from July 2020.
The banking sector’s exposure to tourism was estimated to be about SLRs280 billion ($1.5 billion), and Wickramaratne said that up to 75% of the interest on payments would be subsidized.
The government’s instructions to the country’s banks were direct: they must help stimulate the economy.
While the moratorium was to be treated on a case-by-case basis, the state-owned banks were expected to lead the way, approving applications from clients hoping to participate in the payment waiver. But it seems that the approvals weren’t extended quickly enough or as far as the government had wanted, according to Kodituwakku.
Still, there is a question of whether or not change at the top was even the right answer to the question.
“The negativity came from the front line,” says Kodituwakku. “With this type of initiative, there is resistance from the branch managers.”
Ranjith Kodituwakku, People’s Bank
Communication is often a problem. Some bankers at rival institutions say that the government also wasn’t clear in communicating the terms of the debt moratorium, leading some customers to believe that their debts would be completely forgiven.
While the government cannot directly oust the leaders of privately owned banks, Kodituwakku says that the removal of state bank executives should be seen as a warning to the whole sector to take the government’s stimulus plans seriously.
It is not clear how long the interim executives will be in power. Sri Lanka is set to hold a parliamentary election on April 25, after which permanent leaders will be appointed.
“Personally, I feel that what the government did was the right thing,” says Kodituwakku of the government’s stimulus plans. “As a government bank, it is our responsibility to see our customers through difficult times.”
Those difficult times have become even worse, thanks to the arrival of the coronavirus Covid-19. The government has banned passenger flights and ships indefinitely, and has closed a main highway in the country.
Kodituwakku says the portion of the bank’s book affected by the debt pause is small at the moment: less than 5% of the loan book is affected by the SME freeze, and most of those loans are small in size.
The bank’s non-performing loan ratio is just 3.2%, one of the lowest levels in Sri Lanka.
Bank of Ceylon is likewise only minimally exposed to affected SMEs because its loan book is largely focused on state-owned entities and large domestic corporations.
But banks that have not embraced the moratorium to its fullest extent will have no choice but to do so.
Sri Lankan president Gotabaya Rajapaksa says he plans to give a fresh suspension on all loan payments for six months as a way of dealing with the coronavirus outbreak.
The People’s Bank’s strength still remains at the grassroots level- Rasitha Gunawardana, People’s Bank
On March 23, the president’s office announced that the six-month grace period will continue to include the tourism industry and SMEs, and will be extended to cover the textile industry – an important pillar of the economy. The central bank will undertake the refinancing of that money.
In addition People’s Bank and other state-owned banks, including Bank of Ceylon, must invest in treasury bonds to stabilize the money market at 7%. The step is one of several measures announced to protect Sri Lankans in volatile markets. In addition, the recovery of personal loans of less than SLR1 million has been suspended for three months.
Since Asiamoney spoke with executives at People’s Bank in the middle of February, the coronavirus has spread and the damage to the economy has grown well beyond what people had expected just weeks earlier. The additional pause to loan payments, which was rumoured in February, has officially been announced, but Kodituwakku says that People’s Bank is waiting for official communications before following through.
The effects of the debt freeze are yet to be seen. Ratings agency Moody’s Investors Service wrote in January, when applications were initially opened for SMEs, that it expects to see an increase in bad debts when the grace period is over, particularly if the economy remains weak.
The moratorium was seen as a credit negative for Sri Lankan banks and the sovereign because it could increase SMEs’ risk appetite and relax their attitude toward repayments, Moody’s said.
The Easter Sunday attack was a massive blow to Sri Lanka. The country appeared to have put violence behind it after three decades of civil war ended in 2009, but the shock of the attacks ripped through the country’s economy and tourists have stayed away.
Though tourist numbers started to pick up again in late 2019, they have taken another hit with the outbreak of coronavirus. The country also held a presidential election in November 2019, and the economy had been in a holding pattern in the lead up to that.
“Last year was a real challenge for us, especially after the Easter attack,” says Kodituwakku.
People’s Bank saw itself in a position to help its customers, as the economy struggled and delinquencies were on the rise. Looking beyond the government’s debt moratorium, this meant speaking with clients that were hit the hardest and arranging special loans or delaying repayments. Industries outside tourism slumped, as the lack of spending and foreign cash hit nearly all sectors.
Now, the coronavirus has hit Sri Lanka’s supply chain, creating further difficulties.
“It’s a really hard time in terms of the economy,” says Kodituwakku. “We are very accommodating; as a state bank we must be.”
People’s Bank, which reported total assets of SLR1.82 trillion at the end of September 2019, up 4.6% year on year, sees some opportunities.
Because the private banks have been slow to embrace the debt moratorium, some of their clients have turned to state-owned banks for help. Kodituwakku says that this is an opportunity for People’s Bank to attract new clients.
That is not to say that the private-sector banks aren’t offering help to their clients, Kodituwakku is quick to point out, but they may be selective about applications for assistance.
“In most of the cases, the customers feel very comfortable with the state banks when it comes to delinquency,” says Kodituwakku.
He sees the current situation as a temporary setback for what could otherwise be good future business: if the bank gives concessions now to clients, it will have an opportunity to build long-term relationships with them.
People’s Bank’s plans
When Asiamoney spoke with the former CEO of People’s Bank, Rasitha Gunawardana, just weeks before his departure, he was gregarious and eager to talk about his ambitions for the bank.
“The People’s Bank’s strength still remains at the grassroots level,” he told Asiamoney. “Our strength lies in the rural areas, the village areas and the small and medium-sized enterprise sectors.”
People’s Bank approaches its digital ambitions with this in mind, he told us. The bank won Asiamoney’s best digital bank of Sri Lanka in 2019 and 2020 for its use of technology to meet customers’ needs.
It may be surprising for a state bank that can often seem bound by government ties and bureaucracy, but Gunawardana and his predecessor N Vasantha Kumar were both keen to make sure People’s was Sri Lanka’s most digital bank.
“As far as Sri Lanka is concerned, I feel that we were the pioneers,” Gunawardana said, explaining that the bank positioned itself to be a first mover in Sri Lanka.
In some ways that put the bank one step ahead of its competitors, but in other ways, it meant the bank’s rivals had a clearer path towards their own digital strategies.
“They see what has happened, some of the teething problems we had, and their journey is much easier,” Gunawardana said.
People’s Bank was focused on using its technology to improve financial inclusion in rural areas – its core constituency.
“We were not really thinking of the big corporates and the big city guys,” says Gunawardana. “We were mostly concerned about our basic market stronghold of the rural area.”
The bank’s digital programmes have expanded rapidly. They began with digital account opening and the ability to onboard customers outside of branches.
There is a general lack of awareness about banking products available outside of a basic savings accounts, so the expansion of People’s Bank’s digital products has gone hand in hand with educating customers, encouraging them to take a more active stake in their banking and thus the economy, Gunawardana said.
In 2019, one of the bank’s biggest feats was launching a digital retail loan origination system called WiZCredit that speeds up typical retail loan processing from one week to just one day.
The system also allows customers to bundle multiple loans and open additional accounts.
In the coming year, People’s Bank plans to make the loan process completely paperless, through the use of digital signatures.
While People’s Bank is mainly a retail bank, it is also looking to attract more corporate clients. The bank recently launched an app for corporate banking that allows users to incorporate their finances, payrolls and other parts of their businesses. The clients can then use the bank’s support online.
“Being a retail-centric bank, we have been somewhat neglectful of the corporate sector,” Gunawardana said. “This is an opportunity for us to go and get some of the biggest corporates on board.”
In 2020, the bank is looking at more payment options for its retail customers, including QR payments and a digital wallet.
“We have to keep our game dynamic,” said Gunawardana. “We can’t be static, we can’t be complacent… and we must be aware of the market requirements and market trends.”
His successor may well draw the same conclusion.
But it is not just market trends that the chief executives of state-owned banks need to pay attention to. Political trends, too, can be decisive – bringing an end to the tenure of a promising chief executive just as he is getting started.