Mercantile investments: why stability and trust matters in a low interest rate environment

Dhanushka Fonseka, Chief Operating Officer/ Director at Mercantile Investments

The listed finance company has built a strong reputation, and that is helping it navigate the economic crisis

Founded in 1964, Mercantile Investments and Finance Plc (popularly known as Mercantile Investments) is in a position of strength and stability to help businesses and investors navigate the COVID-19 induced economic slump, explains Dhanushka Fonseka, Chief Operating Officer/ Director at Mercantile Investments. “In a low interest rate environment, a stable finance company can still deliver value to investors” Fonseka says.

How has COVID-19 impacted Mercantile Investments?

For an export-based economy dependent on a few sectors hardest hit by the global economy, such as apparels and tourism, the impact on Sri Lanka’s economy is severe; the recovery will be a prolonged one. In this context, the non-bank financial institutions, or NBFIs, were hit by a double whammy: the 2019 Easter terror attacks and COVID-19. Both these events impacted the loan books of NBFIs, recoveries and cashflows. Deposit growth has declined across the industry, due to falling interest rates and investors turning to other investment options like listed equities, money market and real estate in search of better yields.

At Mercantile Investments, however, we have managed our Rs22 billion deposit base and assets valued at Rs41 billion prudently which allowed us to record a 17% growth in profits compared to the previous year for the first six months of the 2020/21 financial year. Our performance is testament to how well we have focused on customer expectations — on the one hand, delivering bespoke financial solutions to help them tide over the ongoing economic crisis, while efficiently managing costs, and risks on the other.

We made it a priority to ensure we maintained healthy cashflows. We made advance interest payments on fixed deposits before their due dates during the nationwide lockdown period. We did this to secure our deposit base by establishing strong investor confidence. Mercantile Investments serves an enviable loyal client base that has been with the company for decades. Our clients are mainly from the Western Province, and this geographical focus has always served us well. We are now expanding outside the province to offset any deposit outflows we may experience.

What is your prediction for interest rates in 2021?

The economic slowdown caused by the pandemic has significantly impacted government revenue with the budget deficit projected at 7.9%. With foreign exchange earnings from exports, tourism, and worker remittances drastically reduced, the only option to stimulate the economy is to maintain rates at low levels. There’s excess liquidity in the market and less demand for credit. I believe interest rates may ease further and gradually pick up from 2022.

People may opt for higher-yielding investment options like equity and real estate. However, fixed deposits from a stable financial institution can still provide security and consistent cashflows which is more important to tide over this economic crisis. In a low interest rate environment, a stable finance company can still deliver value to investors without much of the risks inherent with equities and even property.

How can Mercantile Investments contribute to rebuilding the economy and reviving businesses?

The key ingredient to driving economic recovery and getting back to normal will be creating confidence. People will need to feel confident that they can spend, save, or invest and fully engage with their day-to-day lives. Finance companies have an opportunity to step up and lead this recovery by facilitating financial well-being and introducing innovative digital offerings to help businesses get back on track: these are what we are focusing on at Mercantile Investments.

Improving access to finance and inclusivity and empowering small businesses is core to what we do. We will expand our branch network in 2021, and this will create new job opportunities outside the Western Province, improve access to finance and contribute to more inclusive growth.

We will launch a gold-backed loan product to help people with their short-term cash needs. We have a microloans division specialising in uplifting women entrepreneurs who do not have access to bank finance. I believe this is a significant contribution we are making towards building a more inclusive and prosperous economy from the ground up.

What is the contribution of the NBFI sector to the economy?

The NBFI sector’s contribution to the entire finance sector is around 8–10% and although this is low, we facilitate financial inclusiveness in the country more than the banking sector. Meaning, we mostly lend to the informal sector that does not have access to banks. This is reflected by the number of credit reports from CRIB that are obtained by NBFIs: this is around 55% of total reports issued by CRIB. The total deposit base of the industry amounts to Rs760 billion. So it is evident that the NBFI sector is critical to the economy.

How is MI differentiating itself from the rest of the market in terms of financial products and services?

Mercantile Investments has an unblemished track record that spans 55 years, and many of our clients have been with us for several decades because they trust our stability and strength. We have exceeded the prudential requirements for the NBFI sector and built more than adequate capital buffers. With a capital adequacy ratio of 14%, Mercantile Investments is among the top 10 out of a crowded market of 41 NBFIs.

We have an impressive capital base of over Rs9 billion and a liquid asset ratio of 19.10% amounting to a surplus of Rs3 billion, well above the 6% regulatory requirement. These indicators paint a clear picture of how well we are managing liquidity during the crisis. As a company, we made sure to keep our employees safe. Because we managed liquidity well, everyone got their full salaries, we even paid bonuses and provided relief to families of the staff during the lockdown period.

MERCANTILE INVESTMENTS HAS AN UNBLEMISHED TRACK RECORD THAT SPANS 55 YEARS, AND OUR CLIENTS TRUST OUR STABILITY AND STRENGTH

We have an open-door policy so any customer can meet any member of the senior management team without a prior appointment to discuss any business matter. We have quite a dynamic young sales force and a network of 39 branches island wide. We believe in providing a financial solution to every client. So, while we offer typical loans or leasing, we have tailored our financial products to meet varied requirements and needs of businesses or individuals. In terms of services, we offer savings and fixed deposits, vehicle loans, corporate loans, pledge loans, mortgage loans, special credit facilities for micro, small, and medium businesses and will soon launch gold-backed loans and a branded ATM card.

The traditional brick-and-mortar model has run its course, and the future is in digital. The COVID-19 pandemic and the new normal around social distancing has only reinforced this fact. We continue to invest in innovative systems that help us optimise processes, and we refreshed our digital offerings to meet the evolving expectations of our clients.

We enabled our customers to pay their rentals at any of the over 30,000 merchants on the mCash network. We launched an interactive website (www.mi.com) which allows customers to process any transaction online, and we will soon introduce a mobile app for a more convenient and seamless user experience.

 

MERCANTILE INVESTMENTS SERVES AN ENVIABLE LOYAL CLIENT BASE THAT HAS BEEN WITH THE COMPANY FOR DECADES