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Tuesday August 16th, 2022

Commercial Bank: empowering enterprises and resetting the economy

Sanath Manatunge Managing Director and Chief Executive Officer of Commercial Bank of Ceylon Plc

Sanath Manatunge discusses the importance of supporting enterprises to revive the economy and what Sri Lanka can do to overcome the economic crisis, unlock opportunities, and position itself on a sustainable growth trajectory. Manatunge is Managing Director and Chief Executive Officer of Commercial Bank of Ceylon Plc, Sri Lanka’s largest private sector bank.

As the leading private sector bank in Sri Lanka, what is the bank’s outlook for the economy?

The country is experiencing one of the most challenging periods of its history and the many challenges we face are mounting daily due to the volatile and vulnerable nature of the economy, making accurate predictions an arduous exercise. However, there are a few insights we can attempt to glean from the current status.

Elevated fiscal and external risks stemming from dwindling foreign currency reserves of the country and the obligatory debt repayments pending will contract economic activities in 2022. Securing negotiated bridging finance facilities fast is critical to overcoming the external liquidity and debt sustainability challenges. It is encouraging to see that the groundwork for this is being laid, and the success of these negotiations will offer a much-needed road map for the economic revival.

Inflation will stay elevated, increasing pressure on purchasing power, supply chains and other economic activities.

Worker remittances, which play a very decisive role in the health and recovery of the economy, are expected to improve with the corrective measures adopted by the regulator. However, our key foreign currency earning sectors, such as tourism and exports, will have a mediocre performance unless the prevailing challenges are addressed swiftly. On a positive note, we can expect a gradual improvement in the GDP in the coming years, provided we can promptly implement the structural reforms sponsored by organizations such as the IMF with policy consistency.

Any suggestions on how we should approach reviving the economy?

Among the factors needing urgent attention is bringing political and social stability to establish a clear and consistent policy framework to both contain the acute economic hardships and lay the foundation for economic revival. Continued unrest, uncertainty, and ambiguity in any of the above areas will hinder the attempts to revive the economy, resulting in the loss of confidence in the minds of our external lenders, investors, and potential funding agencies. We must hold firm, stay focused and be disciplined on all fronts whilst we grapple with the challenges and craft possible solutions. Regulating the supplies of vital goods and services is critical for unhindered manufacturing and production to continue.

In the short term, we should pay attention to revenue-driven fiscal consolidation, which is to take immediate steps to increase government revenue. Action plans are needed to increase foreign worker remittances, reform, and rehabilitate loss-making state organizations, and build an adequate and efficient safety net for the most economically vulnerable groups.

In the long term, we will need robust and ambitious strategies for FDI promotion and support export expansion and growth. Long-term economic sustainability and foreign currency reserve recovery would depend on these initiatives. Sri Lanka must focus on facilitating more FDIs than ever before. We need effective action plans to revive the tourism sector and support our export clusters such as apparel, tea, cinnamon, and other crops, especially as value-added exports.

Domestic production should increase to control inflation and contain the drain on foreign currency reserves. We should protect the agricultural sector to ensure food security and support SMEs, the backbone of the economy, to face the current challenges and sustain their businesses to support the economic revival.

To sum up, Sri Lanka must embark on a comprehensive economic reform programme to revive the economy and place it on a long-term sustainable growth trajectory, today. We need to do this with a sense of urgency, focusing on critical areas such as labour, state-owned enterprises and building foreign currency reserves.

Where do you see the growth opportunities emerging?

Our key growth sectors will continue to be tourism, worker remittances, and exports – both traditional and non-traditional. The country should re-establish and enhance its hub status by ensuring infrastructure availability and policy consistency. Investment canvassing for the Colombo Port City will also lead to economic gains for the country. Effectively addressing prevailing infrastructure and logistical challenges will help the BPO and IT sectors, where we already hold significant advantages, gain renewed vigour and traction. The BPO and digital services sectors can potentially become drivers of economic growth for Sri Lanka. Last but not least, as discussed already, the SME sector holds much promise and untapped potential. They must be fostered, nurtured, and guided, with ambitious growth targets set at the national level to spearhead SME development and thereby broad-basing economic revival and growth for a more inclusive economy.

How do you see the unfolding economic crisis impacting the banking sector?

The biggest challenges will be maintaining healthy liquidity, capital buffers and foreign currency reserves. The rating downgrades of the country have affected the ratings of the banks as well, making it a challenge for banks to operate in international markets to raise much-needed foreign currency liquidity.

Containing Non-Performing Loans (NPLs) whilst generating growth amidst rising inflation and a falling currency will negatively impact banking sector profitability. Rising inflation has eroded purchasing power, hindering savings, and driving NPLs higher. Increasing interest rates have slowed down credit growth and dampened prospects for loan book expansion. All of the above factors will affect the agility and the profitability of the banking sector in the long term.

With internal costs rising exponentially, especially in managing facilities, staff, recoveries and operations, and contracting income and profits, banks will have a tough time containing costs. Another contributing factor to this will be the emergence of new risks – such as model risk, conduct risk, bribery risk and more. Banks will need to identify, classify, measure, and manage those risks, requiring significant financial and human capital allocations. Governance-related investments will also rise with new business governance mechanisms such as the ESG framework (Environment, Sustainability, Governance) emerging in the rest of the world. Banks will have to adhere to these to stay locally and internationally competitive.

What are some of the factors that will shape the banking sector in the months ahead?

A lot will depend on how much external support we manage to negotiate as a country, especially from organizations such as the IMF. The effectiveness of the sovereign debt restructuring exercise will positively impact ratings, so we are encouraged that the authorities have engaged the services of world-renowned experts on international debt restructuring.

The foreign currency liquidity crisis is a pressing concern affecting the banking sector. How effectively we address this issue and the calibre of policies and frameworks developed will decide the future of banking in the long term.

Availability of essential goods, fuel and a stable electricity supply will be another factor to watch. The economic cycle of inadequate production leads to inflation and eroding disposable consumer incomes, and inevitably, borrowers struggle to service their bank loans. In this scenario, the biggest challenge for banks will be how best to safeguard their customers, especially SMEs and micro-entrepreneurs, whilst managing NPLs and maintaining reasonable margins.

How effectively the sector takes advantage of technology, utilizing it not just for its products and services but also operationally to gain competitive advantages, will be a driver of success during this turbulent period. In an environment where growth opportunities are tight, banks must constantly strive to improve their cost-to-income ratios to remain competitive. All these are to be done whilst creating shareholder value, maintaining governance and sustainability protocols, and staying ahead of the competition by offering an attractive range of products and services.

How is Commercial Bank positioned to take on the challenges confronting the banking sector and provide stability to the rest of the economy?

We are not immune to the economic crisis but being a bigger bank has its advantages. We continue to carry the pandemic impacts such as servicing mandatory moratorium support and managing expectations to continuously exude stability and deliver meticulous service as the largest private bank in the country.

We possess a few positive attributes that indeed afford us greater resilience, such as our export market share, success in worker remittances business, healthy CASA ratio and the strength of our overseas operations in Bangladesh, Maldives, and Myanmar. The Bangladesh operation accounts for 15-20% of our bottom line.

Our reputation as a bank within the international sphere is unblemished and outstanding, just as our stellar corporate image within the country, making it easier for us to get things done internationally.

Our comprehensive governance and risk management frameworks ensure maximum coverage and readiness for risks and opportunities to convert them into opportunities. The loyalty of our customers, who have been with us for generations, has enabled us to be the leader in all key spheres of banking – retail, corporate, and SMEs – allowing us to be more prudent and quality-conscious about our debt portfolio.

We possess a dynamic and thoroughly professional team geared to face any challenge head-on and build lasting relationships with our customers to offer them feasible solutions.

The external environment is turbulent; however, we have the expertise and the financial strength to walk the fine line between supporting business and maintaining the overall stability of the bank. It also must be stated that banks are very well regulated, so they can withstand any economic challenge, lead the revival, and drive growth, as they have always proven.

How will Commercial Bank support enterprises during these challenging times to unlock growth opportunities?

As a Domestic Systemically Important Bank, we have been a driving force in partnering and cooperating with national economic development efforts, playing a significant role in the post-pandemic recovery process. Our support extended to granting working capital loans and concessions to affected sectors, which stretched beyond the mandated debt moratorium measures. In the face of uncertainty, we will continue to build on our post-Covid momentum in rolling out relief programmes, having emerged as the leading lender and provider of relief amongst private sector banks during Covid-19. During that period, we initiated two loan programmes for SMEs and micro-enterprises affected by the pandemic.

We have a strategic approach towards supporting enterprises, particularly SMEs and Micro SME segments and businesses led by women, securing international credit lines to cater exclusively to these segments. Our focus would be on maintaining debt sustainability by collaborating closely with customers to rehabilitate, restructure and re-evaluate facilities – our support extends beyond giving loans. We will continue to work with chambers and industry bodies in providing necessary knowledge in business management, crisis management, trade opportunities and financial skills to our customers.

Commercial Bank will continue to be an active advocate and a participant in dialogues with the government, regulators and non-government organizations on economic revival and policy creation related to banking and finance. As a Sri Lankan entity, we pledge to be committed to serving our country as our bank has done for over 100 years.

What is your value proposition to SMEs fighting for survival and export companies and others seeking to expand overseas?

The SME sector forms the backbone of the Sri Lankan economy, accounting for 80% of all businesses and 35% of jobs in the country.

A 2021 report by the Ministry of Finance identifies Commercial Bank as the largest lender to the SME segment, which speaks amply of our focus and commitment. The bank pioneered the relationship management concept in this sector, building exclusive SME teams with SME Managers and SME Relationship Officers to proactively identify the needs and challenges of businesses during this turbulent time, including enterprises led by women. The export sector is one of the main focus segments of the bank, and local industries will get priority support, specifically those that manufacture import substitutes. The bank will also use its supremacy in the digital sphere to better serve this segment by introducing innovative digital financial solutions.

The bank has identified that the need of the hour for industries is clarity on the prevailing situation and how exactly the economic conditions will impact their operations. Therefore, we will continue to educate them and hold their hands throughout the process, going beyond just granting them a facility but ensuring that they continue to unlock their potential to thrive in a hostile business environment. That is the consistent message we have communicated to our team across the country so that our customers and the bank can eventually emerge from this crisis stronger as partners.