Dhanushka Fonseka, Director and Chief Operating Officer at Mercantile Investments and Finance Plc, shares insights into the unfolding economic challenges, outlines the way forward for a quick recovery and discusses the listed finance company’s inherent strengths allowing it to navigate through the storm unfazed.
For context for this interview, what is your outlook for the economy, and how is Mercantile Investments (MI) approaching the unfolding crisis?
Sri Lanka is facing the worst economic crisis since 1948. Sometimes you wonder how a country endowed with natural resources in rich abundance ever came to this situation.
Even though we have defaulted on our foreign debt, I believe we can bounce back faster than countries like Afghanistan and Lebanon that have gone through similar situations.
Firstly, Sri Lanka needs to create dynamic and stable policies and intensify efforts to improve crucial foreign income sources like exports, worker remittances, tourism and FDIs with much more focus and urgency.
Our remittances have dropped from around $7 billion post-Covid to around $2.5 billion today, precipitating the current forex crisis. We have about three million Sri Lankans working abroad, so it is a matter of creating confidence and stability so that they can channel their foreign exchange earnings via official channels. Similarly, reviving tourism should not be a daunting challenge because the diverse natural wonders that make Sri Lanka a great destination will not disappear because of the economic crisis. We are a nation that fought many battles in the past, and there is no doubt in my mind that we can emerge stronger from the unfolding crisis, provided we have the right policies and plans in place.
As a company, Mercantile Investments and Finance is in a solid position to ride out this challenging period for the economy. Despite the many disruptive influences from the 2019 Easter bombings, the prolonged Covid-19 pandemic, and the present challenges from acute shortages of energy and essentials and rising inflation, we steered the company to a position of strength. We managed the company prudently, engineering impressive financial results in the recent financial year, creating stability and value for our customers and investors.
We recorded the highest profit in Mercantile Investments’ 58 years of service to the nation. Our profit before- and after-tax stood at Rs1.47 billion and Rs1 billion, respectively. The deposit base grew 14.3% during the year, and total assets increased 12.6% to Rs46.9 billion. Shareholder funds stand at Rs10.9 billion, and our core capital ratio, at 15.45%, is well above the regulatory requirement. Our network of 42 branches serves over 75,000 customers with innovative financial products and services. Our newest addition to our portfolio is a gold loan product, fast gaining momentum in the market because we understood a specific need for short-term cash. The benefit we provide is that customers redeeming their jewellery within seven working days do not have to pay the interest on the loan.
How do you see the unfolding economic crisis impacting the NBFI sector?
The NBFI sector is not as exposed as the banking industry to foreign markets, so the impact on NBFIs from global economic headwinds is relatively muted. However, the import restrictions and the current policy rate hikes have placed breaks on the NBFI sector, where lending at these rates is quite challenging.
The NBFI industry comprises 37 finance companies and three specialized leasing companies operating in a crowded market. Total NBFI sector loans top Rs1.2 trillion with a deposit base valued at Rs810 billion. The NBFI sector, serving over four million customers, is a significant contributor and driver of economic growth, primarily by empowering communities that cannot access banks and the informal economy that operates below the banking sector radar. Also, NBFIs account for over 55% of credit reports issued by CRIB, demonstrating their standing as an enabler of the formal economy.
As I said, the recent policy rate hike is challenging NBFIs. However, it was a good move by the Central Bank because it contained further overheating of the economy and avoided a chaotic situation. High lending rates are natural in Sri Lanka. Just five years ago, lending rates ranged from 20-30%. However, since applying the monetary policy breaks, we are beginning to see benchmark Treasury bill yields ease.
How is Mercantile Investments positioned to take on the challenges confronting the NBFI sector and provide stability to its customers and other stakeholders?
As I mentioned earlier, among the challenges confronting the NBFI sector are the import restrictions curtailing our leasing businesses. However, at Mercantile Investments, we prudently grew our asset book and client base by focusing on small-scale facilities.
Moreover, the SME sector is the backbone of an economy. Hence, we continue to lend during these hostile market conditions to support the SME sector. We have a large clientele in the agriculture sector, and our continuous support enables them to sustain food production in the country.
Further, we are one of the few companies in the industry deeply embedded with the Micro Grameen sector. We strongly believe financial inclusion is one of the key elements for economic growth, and the Grameen concept will help improve financial inclusion in the country. We have a special-purpose loan scheme for women entrepreneurs where we provide loans from Rs50,000 to micro-businesses to start them on the journey, and as they progress, we provide credit up to Rs250,000 to finance their growth.
What is your value proposition to your deposit customers and borrowers, particularly leasing and SME clients? How will you approach servicing the different needs of your customer base?
In the NBFI sector, customers rely on relationships based on dependability and trust, attributes amply demonstrated by Mercantile Investments. Especially during difficult times, like now, we have seen our deposit base grow an impressive 20% in the last three months without any effort to campaign for deposits. The reason for the growth boils down to the long-standing relationships employees have with our customers. In an economic crisis, customers value the comfort factor and stability of a financial institution to secure their investments and savings. Our employees are our prized asset because they build and nurture meaningful relationships with customers based on respect and trust.
Most of our employees have been with us for over a decade. Their customer relationships have stood the test of time and form the bedrock of our successes. That is why they come to us to secure their deposits at a time like this. Furthermore, when it comes to our leasing clients, most of them have been with us for many years. More than 80% of our leasing client base comprises repeat business, enabling us to understand their business models and requirements better so that we can craft the solutions that best suit their needs.
How are you harnessing the power of innovation and technology?
We are a company that believes in the power of technology to disrupt and empower. We will continue investing in new technology to enhance customer experiences and improve operational efficiencies.
Currently, we are in the process of migrating our entire IT system to a more advanced platform. We have partnered with Scienter and MIT for this project, and in the next six months, we will launch the new platform, which will consist of E-wallets for mobile apps.
At the moment, customers can make their payments via our website. Once the new system comes online, our customers can enjoy an elevated level of superior services and state-of-the-art solutions. We have partnered with mCash, where customers have access to over 30,000 merchants across the country to make their payments.