Throughout 2018, the operating conditions for Sri Lanka’s banks are said to remain challenging. The lower growth in credit and profitability, higher bad loan provisioning and capital adequacy amid sluggish economic growth and falling disposable incomes, in short sums up the key issues the country’s banking sector has to deal with. Most of the larger banks are expected to overcome these issues relatively unbruised but some of the smaller and mid-sized banks may not be that lucky. In this backdrop, Mirror Business sat for a chat with Nimal Tillekeratne, CEO of Pan Asia Banking Corporation PLC, a mid-sized lender with an asset base of little over Rs.150 billion, to find out how Pan Asia Bank is addressing these challenges.
Following are the excerpts from the interview.
You took over as CEO of Pan Asia Bank early 2017. How has the journey so far been?
Well, it has certainly been a challenging journey so far. After my taking over, the biggest issues were the NPAs and lack of direction in the bank. We had a few heads of department who were not fitting into the bank’s development plans. So, we cleared up those things amicably and started concentrating on NPAs. If you look at our recently released results, we have done better than the industry. We identified the early warnings given by our economist—an outside party. His advice was that the interest rates were going to be higher and there would be pressure on the retail side, so be careful. We took that positively and started cleaning up the book first. We refrained from giving loans in an aggressive manner. While other banks were seen lending very aggressively during last year; we deliberately went slower specially on the retail side.
Also, heavy emphasis was given to the credit card side because it was growing at a rate. We had the fastest growing credit card portfolio in the country in 2016 and 2017. Earlier we didn’t see a lot of NPAs coming in. But then my concern was when the NPAs start getting matured, specially with regards to credit card and retail loans. So, we put brakes on to the credit card side and decided to first think of the quality before we expand. As a result, we brought in a lot of controls to maintain the quality of the book. I think our strategy paid off. The credit card NPAs are coming down. Yes, growth has slowed down. But we don’t mind it. It’s better to go slow rather than packing ourselves up with more and more NPAs.
At the same time, there were certain product offerings that we increased our focus upon. For example, our ‘Sammana’ loans, designed for pensioners, worked very well. The NPLs were just about 0.8 percent. That was a good base and developing on that, we brought in a pension advance scheme also. We give up to Rs.30,000 pension advance. How people take these advances is a good indication how pressurized the economy is. They take the pension today and then tomorrow come for pension advance for next month. It’s a classic indication that people are desperate for cash.
What was your approach to handle the bank’s staff? It is said that Pan Asia Bank has one of the highest staff turnover rates?
Yes, this bank had a 20 percent attrition rate, when I took over, mainly up to E2 level. The board was very concerned about it and we started adjusting the salaries. So, now, we are almost on par with the industry as far as up to the executive/senior executive level. In the annual report, we tend to say the staff is our biggest asset. But rarely do we see companies walking the talk. We introduced good loan schemes to the staff again on par with the industry. Earlier may be people didn’t think of it because the bank’s profitability was wayward—one year the profits are up and the next year they are down.
What happened in the past was after working for about one to two years, when they are offered small increases in their salaries they went to work for other places. Now that has stopped. Other main thing we did was, we did not have a clear cut promotion plan. There was no policy as such. This year we introduced the policy of promotions for all grades. Whenever I address a forum I ask the staff whether you are happy with the promotions criteria and thank god 99 percent of the people say they are happy. This I believe is a major achievement for the bank.
It seems that you had some tough calls to make?
Yes. Our bank was traditionally high on NPAs, high on attrition, high on interest rates on both deposits and lending. You can’t run a business that way. Some point you have to make a decision. To get the deposits you pay higher rates. Then to meet your profitability targets you try to lend at higher rates. But people won’t take when other banks are offering loans at lower rates.
Those were some of the tough internal calls you had to make. But the external front has also not been very kind to you…
Yes, the banking sector is going through a rough patch and, as small or mid-sized players, we are feeling it more than the bigger players. There is a deposit crunch in the market. It is surprising to see even the traditionally well-to-do banks are also approaching our customers and are offering the same or higher rates to get the deposits to them. That means there is kind of an illiquid position in the market. This is unheard of—banks offering 25 basis points more to get the deposits. Banks don’t compete like that. So, there is an issue in the market.
The money circulation in the economy also remains very low. The big government projects have to happen. For example, a lot of our customers are not paid on time. So, when the payment is held at the top level, the whole chain gets affected. People are uncertain as to what to do. I know a lot of people in Pettah who are downsizing their volumes. In these conditions it is very difficult to maintain profitability.
Everything in the economy seems fundamentally right but why are the interest rates going up? We also have no idea why it is happening. The banks that are unheard of competing for deposits are competing with us. That should not be the case. We have our own model and they have theirs. It looks like that there is a shortage in the market. If I want 12.5 percent for my one-year FD, there is a bank offering that. Even some big banks are offering such rates. When you jack up the interest rates on the deposit side, you have to reprice the lending portfolio. It is against the Central Bank fundamentals.
During the bank CEOs’ meeting at the Central Bank, the governor himself asked us why this was happening. We had no answer to give.
So, in these tough times, we have decided to tread very carefully, not being overly aggressive. If you are dropping your guard to grow, that’s a very dangerous thing to do. That is why we want to do the cherry picking. We will be very selective, specially when it comes to lending.
But still you have loaned about Rs.11.5 billion in new loans for the first six months?
Yes, it was much better than the entire last year. Our gross NPA was slightly higher but the net NPL has come down by 10 basis points. The good news is that in the next half we have planned out to reduce our NPAs by at least by about Rs.800 million. The single largest NPA is about Rs.375 million. We have a repayment arrangement coming in and a few other big timers are also settling their loans.
What were the sectors that these loans went to?
Mainly, small and medium enterprises. We were very cautious about gold-backed pawning loans. Actually the government was telling us to look at the possibilities of increasing the pawning quota. But I believe the banks should have the freedom to manage their loan portfolios prudently because otherwise somebody is going to get hit ultimately.
How cautious would you be in lending in the next six months?
First thing, every bank should know what is happening in the economy. If the economy doesn’t show signs of rejuvenation, it is not prudent for the banks to go and lend aggressively. There are certain sectors we try to avoid in terms of lending. But unfortunately those are the sectors the bank should be supporting and lending. But the repayments and stability factor of these sectors are so questionable that banks are naturally reluctant.
As far as Pan Asia Bank is concerned, I believe the biggest problem you are facing apart from higher NPLs is the capital adequacy…
Yes, capital is something we are working on at the moment. We have a capital augmentation plan. We are going for a Rs.4 billion private placement for which we have received the Central Bank approval in come September or October. The investors have been identified. This would be an unlisted debenture issue.
But I must say we don’t have the freedom to raise the capital the way we want. It is kind of a plus point as well as a negative point. We have a parent company that will always come to our help whenever the need arises. At the same time, the parent company that is holding a good percentage of shares of the bank doesn’t want it to be diluted. But somebody has to decide by 2020 how are we going to raise the required capital? If the existing shareholders are going to put in the required capital, then there is not going to be any issue. But the problem is that we haven’t paid dividends for a long time. Unless we pay dividends, the shareholders will not be willing to invest more money, which is understandable. We have raised these issues at the board level and the board has to take a decision by the end of this year.
Another issue I’m very concerned about is the credit rating. Higher NPAs and capital issues prevent us from getting a better rating. We have a ‘BBB-’ rating and we are the lowest in the market. At least we need two notches up within a year or two. Rating agencies are saying we are stable. But the drawback is the NPAs and capital. If we can get the NPAs right before end of this year, then we expect our rating to go up at least by one notch.
It is not a secret that the major shareholder of your bank has wide interest in the banking and finance sectors in the country. Is a merger out of the equation?
Well, this question was raised by the management many a time and from the response we have received, I don’t think there will be any mergers.
Owning a bank is a nice thing. But when it comes to the ground realities tough decisions need to be taken. With our profitability we can raise about Rs.3 to 4 billion. This year we might go little beyond Rs.2 billion. Let’s say next year also we raise Rs.2 billion. But still we will have to go to the shareholders for the balance Rs.6 billion. And you can’t just be at the Rs.20 billion mark because you need Rs.20 billion plus to be comfortable.
On top of that you have new reporting standards, IFRS 9 to deal with…
Yes, the new reporting standards will have a big impact on banks, specially on the ones that have been lending aggressively. Some banks will have to provide at least 45 to 50 percent for IFRS 9. We may provide about 30 percent. Our auditors’ recommendation is also to bring down the NPAs to soften the impact from IFRS 9. I believe this can be managed. If you are smart enough you can manage the impact coming from the IFRS 9. It’s a call that the banks have to take and adjust during this year. From next year inwards, it will be the internal credit quality of the banks that will determine the impact of IFRS 9 on the bottom line.
But I must say the additional capital requirement of Rs.10 billion by 2020 and IFRS 9 are a double whammy on some banks. There is some discussion going on now to see whether IFRS 9 should be implemented in a staggered basis. More than the private banks, the government banks will have a bigger issue in complying with IFRS 9. Their lending portfolios are very high and their cash flows are not very good. So the impairment losses will be very high. But overall I think higher capital and stringent reporting standards are what we need for a stable banking sector.
How is Pan Asia Bank adapting to the digital transformation happening in the banking sector? We know you are very keen about IT?
I believe that IT, if properly used, enables good business. I’ve been involved in the development of digital channels in a couple of banks. What these fintech companies are harping on may not be timely for Sri Lanka. The infrastructure has to be developed to implement most of these things. Banks cannot go fully digital because there are gaps that cannot be filled by them. Those gaps should be filled by the government. The government has to build the necessary common infrastructure. I’m glad that they are heading in that direction now. For example, the proposed electronic ID card is a good thing. Data will be stored in that card and banks can leverage on the information stored in that card to open accounts remotely because KYC is already there. In such a context you don’t need to have that many branches.
Since you mentioned branches, I assume your branch network building exercise has slowed down?
Yes, it has slowed down drastically. If I were to be very open with you, the Central Bank wants us to stabilize our capital before expanding our branch network. The second thing is the NPAs. What they say is you stabilize your NPAs and then ask for more branches, which is understandable. Probably after the first half results, the Central Bank might go little bit easy on us—that is what I hope and pray.
The Central Bank is continuing with the suspension on your primary dealer activities…
Well, so far there is no mentioning about our involvement in the bond scam. At least for the time being we may have been cleared of that. The only thing is we have not been compliant with certain regulations. It is a non-compliant issue and not an attempt towards fraud or anything like that. We still have denied the charges that we have not complied. You carry out 10,000 transactions and one or two missing out doesn’t mean that in general we haven’t complied.
There may have been instances where we may have missed out, not deliberately but because of normal business. We have communicated this to the Central Bank. The worse thing that can happen is the cancellation of our licence. If that happens we may need to meet our lawyers and evaluate the avenues we have at our disposal to move forward with the matter.
By : Indika Sakalasooriya