An Echelon Media Company
Monday December 4th, 2023

HNB Finance’s Dilshan Rodrigo on resetting the economy

Dilshan Rodrigo Chairman of listed HNB Finance and Executive Director & COO of Hatton National Bank Plc

Dilshan Rodrigo, Chairman at listed HNB Finance, one of the leading registered non-bank financial institutions (NBFIs) in Sri Lanka, defines the economic crisis, gives perspective to the challenges and shares insights into how HNB Finance is making a difference. As the Executive Director and COO at its parent company listed Hatton National Bank – one of the largest private banks in the country – Rodrigo has unique insights into the priorities for reviving the economy.

How is this unfolding economic crisis impacting the NBFI industry?

Every business today is forced to question its sustainability and fight hard for survival, and NBFIs are no exception. For NBFIs, the challenge boils down to the survival of the fittest as the market is overcrowded. We have 24 banks and 37 Central Bank-licensed finance companies in the country. For leasing alone, there are 56 registered leasing establishments with the Central Bank, including 12 banks, finance companies and other special-purpose financial service providers. If you throw in the money lenders in the informal sector, there may be many thousands of players trying to do the same thing, essentially, but at varying degrees and market points.

So the finance industry today is not only oversized compared to the size of the economy, but the prevalence of too many registered and a large number of informal players risks financial system stability and impedes inclusive growth. I, therefore, see an opportunity for consolidation and strengthening the dynamism of the NBFI sector. It will have to happen over the next two to three years, and you will see many NBFIs leaving the industry and some getting bigger and better able to provide a broad range of services and play a more strategic role in the economy.

NBFIs engage in four lines of business at varying degrees, microfinance, leasing, real estate and gold loans. The first two have to contend with various challenges from rising interest rates, supply and mobility constraints and depressed economic activity, so I think the most attractive lines of business will be the real estate and gold loans at this moment in time.

The economy will have little respite over the next six months until we finalize a staff-level agreement with the IMF. It will probably take till December, and then we have to set up a framework for the programme, which will take another six to eight months next year. However, once the IMF staff-level agreement is signed, there will be some relief. We will get probably $800 million to $1 billion coming into the country. Whether we use these funds to settle our debt or be able to utilize them to deal with shortages to tide over the crisis in the short term is a question. Whatever happens, an IMF programme will improve the confidence factor and help secure funding from other sources to ease the supply constraints in essentials and energy.

How is HNB Finance positioned to navigate the challenges confronting the NBFI sector? What makes HNB Finance resilient and better equipped to ride through this crisis, and where do you see the growth opportunities?

Being part of the HNB Group, a financial powerhouse in the country, gives HNB Finance the stability to withstand any challenge and the leadership focus to navigate the storm and unlock growth for our customers. More importantly, the HNB ethos endows us with the reach and significant resources we can prudently commit to targeted segments of the economy like the microfinance sector.

We view the micro and SME sectors as growth catalysts for the economy. We are committed to empowering and enabling them to unlock their potential by improving access to finance and innovative solutions and enhancing financial literacy and soft skills among rural entrepreneurs with various capacity-building initiatives.

DWM (Developing World Markets), an impact investment fund creating investible solutions to meet the social and economic needs of the developing world, has invested in HNB Finance because they believe we can make a difference at scale.

We are constantly exploring options to grow the business, establish competitive advantages and create value for our customers and investors. We recently finalized a merger with Prime Finance, the finance company unit of Prime Lands, one of the largest real estate developers in the country, so that we can create opportunities in this segment which has tremendous potential for growth, particularly for low-cost housing.

HNB Finance has had remarkable growth in the last couple of years despite the many economic challenges from consecutive disruptions starting with the 2019 Easter bombings, Covid-19, and then the current crisis unravelling. Profits grew to Rs418 million in the recently concluded financial year, and our balance sheet expanded 15% to Rs42.2 billion. Our asset quality indicators and statutory ratios are better than our peers in the industry. Our loans-to-deposit ratio is among the lowest in the industry, indicating healthy liquidity levels and stability to drive value for our customers, investors and rural societies during this crisis.

How will HNB Finance be able to provide customers and stakeholders with some stability, assistance to face the crisis and even discover opportunities for growth during these challenging times?

Our customers can rest assured that HNB Finance will always be with them, especially during difficult times. We have a proven track record as a responsible partner they can trust, supporting customers to grow and develop their businesses.

HNB Finance provides opportunities for entrepreneurs and business leaders to improve their financial literacy, management skills and technical capacity, apart from helping meet capital requirements. We also encourage them to approach their businesses with innovative thinking and help plug supply gaps. For example, we assist rural ventures by giving them access to digital platforms to sell and link them with buyers, supply chains and logistics service providers so they can start thinking about transforming themselves to the next level of growth. I believe this holistic approach to servicing our clients is the best antidote for the many challenges arising from the unfolding economic crisis.

Right now, our focus is to develop micro and SME businesses in agriculture, import-substitution assembly and manufacturing, and exports. We introduced a new KPI for HNB Finance branches to help build new export businesses from the communities they serve. Today, a few companies account for 80% of total exports, so the potential to broad base the export sector – and the impact that can have on inclusive growth – are tremendous.

Indigenous products, handlooms, cottage industries and value-added agri products are some of the export industries that carry much promise. We can also support exporters to access global markets and online marketplaces like Kapruka, Alibaba, Amazon, and eBay. We are helping enterprises transition from B2B to B2C and giving them access to digital tools, like online platforms, e-wallets, and social media exposure. I believe that is the purpose behind HNB Finance’s drive, to elevate the economy from the bottom-up.

How do you define the unfolding crisis engulfing Sri Lanka, and how do we come out of it?

I believe that the crisis is fundamentally an economic one. It is unlike anything else we have experienced before, such as the decades-long war, the 2004 tsunami, the 2019 Easter attacks and the Covid-19 pandemic. What we have now is the culmination of a chronic structural issue of affordability; as a nation, we have lived beyond our means. Our growth has been fiscal deficits- and debt-driven, and we don’t export enough to cover our imports. Worker remittances, tourism inflows, and FDI barely helped cover the BoP deficit.

Solving the problem means painful adjustments. The currency depreciation and monetary policy tightening are such adjustments, but they have made it excruciating for businesses to survive and propelled the cost of living to unbearable heights. That is why we need to quickly build the necessary infrastructure to develop our exports, FDI, remittances and tourism and tip the external imbalance in our favour. This requires a fundamental policy rethink toward value-added agriculture and a production-oriented economy. The priority for policymakers is to build confidence by addressing the twin deficit problem. That’s the first step. It will restore faith in domestic markets, reduce supply shortages, and eliminate disruptive price distortions and black markets. Exporters will begin to convert more of their foreign exchange earnings, more Sri Lankans working abroad will send their remittances via formal channels, and investors will feel confident to invest in Sri Lanka again. We must contain wasteful public spending, develop and broad-base the export sector, and encourage Sri Lankan professionals overseas to return and bring their experience, knowledge and expertise back to rebuild.

Government has a big role to play in communicating the policy shift and supporting the shift – buy local, made in Sri Lanka, brand building, move towards value-added manufacturing – component manufacture, mobile, computer accessories and vehicle assembly from that of a mostly commodity exporter since independence. This will ensure our largely unutilized infrastructure highways, port and airports are made use of better.

We are blessed with abundant natural resources and for tourists a land like no other. There is no place in the world, where you can experience the sea, culture and tea gardens within a couple of hours’ drive. This coupled with local artisans and Ayurveda, our smiling nation brings immense tourism opportunities. The focus must be on a niche, region-specific, lifestyle-oriented, eco-tourism. We have so much to learn from countries like Singapore, Maldives and Mauritius! We are far below our potential in both numbers and average tourist spend.

We must embrace digital for all the opportunities it brings to connect customers and businesses locally and to overseas markets. Our youth have immense opportunities to tap global outsourcing markets and sell their professional services (IT, Design, Programming etc. ) and earn foreign currency without leaving our shores. We need to send only skilled labour overseas. There is a huge market for caregivers and health care professionals outside the white-collar segments, we need to invest in their training and generate far more value.

The public must also be prepared to take responsibility for the necessary adjustments to reset the economy. The need of the hour is for migrant workers to send their remittances via official channels, and exporters to convert their earnings without hoarding them overseas. They must understand that withholding their foreign currency for better rates has a far more disruptive impact on their lives and businesses here on the ground when the supply of essentials, production inputs, and fuel constricts the life out of the economy. We all need to stop thinking in silos and become part of the solution.