NDB’s Dimantha Seneviratne discusses Covid-19’s impact on banking
ECONOMYNEXT – The previous 24 months had seen sluggish economic growth due to political uncertainty, Easter attacks and a presidential election. What promised to be a year of economic revival, 2020 brought the coronavirus pandemic to Sri Lanka instead.
Dimantha Seneviratne, NDB Bank’s Group Chief Executive Officer, who is also the current Chairman of Sri Lanka Bank’s Association (Guarantee) Limited (SLBA) discusses the impacts on the banking sector from the prolonged lockdown and the regulator-driven debt moratorium and refinance scheme to Covid-19 hit businesses.
Listed NDB Bank celebrated 40 years in 2019 reporting assets of 536 billion rupees and a deposit base of 405 billion rupees at end December. The bank, one of the fastest-growing in the country recorded the highest CAGR in lending of 21% and deposits by 25% in the last 4 years.
After the lockdown
Right now, the financial sector is managing the liquidity stresses well, however, over the next two years due to credit-related concerns after the moratorium has lapsed, we might see growth in stressed accounts and as a result, NPLs.
We will see tightening of margins and falling profitability, how steeply and fast this will happen depends on how much traction the economy gains during this period.
Borrowers need to be able to pay back their loans so that banks can manage credit quality and liquidity in the market and this level of confidence is critical for credit growth, economic expansion, and stability of the financial sector
With the recent reduction in statutory reserve requirement, the banking sector has ample liquidity. But the next year or two will be tough for Banks.
In the medium-term, banking sector net interest margins are expected to decline to below 3%, on the back of lower interest rates, after hovering around 3.5% – 4% levels over the last five years and return on assets are expected to decline from 2% to 1.5% during this period.
Industry Non-performing loans (NPLs) rose to 5.1% in March 2020 before the COVID-19, which was an unprecedented situation. It came at a time when banks were already saddled with sizable stressed portfolios coming from two years of low economic growth.
Banking sector NPL’s have been rising from 2.5% in 2017 to 4.7% in 2019. There was already a moratorium given to the tourism sector, after the unfortunate Easter attack in April 2019. With the change of government later that year, another moratorium for SMEs came into play. In March 2020 came the unprecedented situation we are in today.
With little credit growth during lockdowns and afterwards as well; also, with the moratoriums in place till September, banking NPLs are not likely to increase by much. After September, however, some customers may yet come out the moratorium unable to service their loans and it’s likely we will see a spike in NPL’s.
We are monitoring the unfolding situation and how it affects our customers. Meanwhile, we are building our capital and strengthening our underwriting standards and teams to proactively manage these accounts for the months ahead. We are taking proactive measures to contain possible risks and engaging with our customers to explore how best we can take care of their needs and help them navigate this period successfully
Supporting the NBFI sector
We are also mindful of the stresses on non-bank financial institutions and NDB has not cut their lines, but in fact, have extended credit to this sector. We have several finance companies that bank with us and they have more difficult challenges to contend with than the banks.
Finance companies play a vital role in the economy as sub-prime lenders to small and medium businesses. Finance companies raise finances for lending from depositor funds for which they pay high-interest rates or bank borrowings.
Unlike banks, finance companies have shorter maturity period on their deposits and interest payable on monthly terms, and when they must extend moratoriums to borrowers; their interest income flows get hit.
NDB Bank kept open the credit lines to our existing portfolio of finance companies so they can tide over-stressed liquidity situations during these challenging times. If finance companies come under stress it will not be long before that spreads to the entire financial system. We felt it, was the right thing to do in the interest of the national economy to help contain this threat.
At a time when the revenue is under pressure, is when the efficiency of a bank comes into play to deliver better results for shareholders and customers. With net interest margins contracting and NPLs rising, we need to think of other ways to deliver decent returns on equity.
Over the last two years, NDB Bank has invested in tech platforms including robotics which executes routine but critical functions so our staff can focus on more important matters such as serving our banking customers. Also, our digital customer proposition, NEOS, saw a significant uptick in adaptation and usage. This will enable the bank to restructure and reallocate resources to meet changing customer engagement efficiently.
We must generate higher volumes to compensate for tightening margins. We have deployed eight workflow solutions which are entirely paperless and helped in a significant reduction in the consumption of paper and time of delivery.
The entire credit approval process is paperless until the customer is issued with an offer letter. The bank’s cost-to-income ratio is about 39%, the best among peer banks in the industry. Despite all these investments, the future depends on how fast the economy turns around and the revenue generation increases
From NDB’s portfolio, around 40% of loan portfolio opted for the moratorium but I must say several clients opted out of it as well. This is a regulatory-driven moratorium. However, if any customer is in genuine distress, a client-centric bank will always support them throughout this difficult period. That support may even extend beyond this year. For instance, the tourism sector will need support beyond six months.
Some customers are innovative and nimble enough to get out of tight spots fast. For instance, our customers in the apparel industry contained falling orders by switching to personal protective gear and managing fixed costs. But most businesses cannot do that and will need support from their banks.
We have a strong corporate and retail portfolio. We also have significant long-term infrastructure projects in our portfolio. This spread of credit risk among different sectors was an advantage.
Our NPLs are the lowest among peer banks in the industry. The outlook on NDB Bank’s A+ credit rating was recently upgraded by Fitch to stable from negative, a testament to our stability. We are on a firm footing to support our clients during this crisis. I only hope Sri Lanka will not experience the second wave of COVID-19 outbreak.
COVID-19 refinance scheme
The 50 billion-rupee refinance scheme earlier announced seems insignificant compared to total banking sector loans at 9 trillion rupees. However, since late June, CBSL announced an increase of the Refinance scheme to 150 billion rupees and arranged for a credit guarantee scheme, a request that the industry made post-Covid. This is a welcome move.
Financing a stimulus or further relief package will be challenging for the government at this juncture. On one side, the country must meet its maturing external debt liabilities amidst a downgrade of the country’s credit ratings.
The government’s tax revenue has also declined because of the various concessions introduced after the elections last year in a bid to revive a struggling economy even at that time. The economy will decline in 2020 and growth will likely be below 2% for the better part of next year.
Several industries have been struggling even before COVID-19 such as construction and tourism and things are likely to get worse. Hence, the success of the moratorium and refinance scheme will depend on the economy’s ability to recover beyond September. Economic management will be critical in the next few months.
The robustness of the financial sector must be protected at all times; which is why we stated that the refinancing scheme should come with a credit guarantee to ensure the most vulnerable business get help without over-stressing the banking sector. Most countries have introduced credit schemes to help businesses harmed by the pandemic backed by a guarantee so that banks are not over-exposed to risk and such aid can reach the businesses without delay
At NDB Bank, we have been lending at 4% to our customers from the bank’s reserves even before the Central Bank approved refinance credit is funded. This is to ensure needy funds are deployed promptly. NDB also came up with another product titled “Jayagamu Sri Lanka” to support exporters and innovators that we launched in June.
Earlier for the “Saubagya” refinance scheme, the Central Bank had to approve all the loan applications vetted and submitted by the banks. Three weeks into the deadline, the Central Bank approved about 28 billion rupees worth of loans out of 50 billion rupees because the regulator was not prepared to handle the large volumes.
With the change of directives, now, banks will make credit decisions themselves, but of course, for the funding at 4%, we must rely on the refinance and other interest subsidy schemes. Furthermore, for several customers, we have extended relief beyond the mandates of the moratorium and refinance credit scheme because we have a responsibility towards our clients.
The purpose of the refinance scheme is to provide temporary working capital, for salaries and other fixed costs. The economy is not strong enough to be without substantial stimulus, considering the overwhelming demand for refinanced loans. However, we need to be mindful of a country’s balance sheet strength.
In that context, the enhanced 150 billion-rupee refinanced loans scheme is probably reasonable. Now with the credit guarantee scheme just announced the banking sector must deploy these funds to the relevant sectors, SMEs and corporates for them to come out from the current stressed situation and contribute to the revival of the economy. All of us in the financial sector has a key role to play in this economic revival.
Unravelling the lockdown
As soon it became clear the lockdown was going to be a prolonged one, NDB Bank’s immediate priority was normalising transaction banking and opening new avenues for people to access cash and pay for food and essentials during the lockdowns.
We also needed to support the various vendors providing food and essential services during the lockdowns and help them connect with consumers.
We needed to provide uninterrupted banking services to ensure that the economy does not grind to a halt.
While ensuring the safety of our staff, which was one of our top priorities, critical back office and frontline divisions in the bank including branches functioned to process essential transactions. In ensuring the safety of our staff, each division had two separate teams rostered to minimise the risk of spreading any potential contagion. We also set up a third backup site for our servers as a precaution and activated a business continuity plan.
We rolled out mobile ATMs and Bank on Wheels to take the banking services to the customers who could not step out due to lockdown restrictions. SLBA, which I chair, coordinated this activity. Further, Chief executives of all the banks joined a WhatsApp group to share route details of mobile ATMs to optimise the reach of the combined fleet and on branch openings.
NDB Bank also delivered cash to senior citizen account holders. We used our mobile units to deliver essential groceries to our customers as well. The next step was connecting out SME customers with e-commerce platforms to sell their goods during the lockdown. We partnered with e-commerce heavyweight, Daraz to enable our SME customers and women entrepreneurs to have a wider customer reach. We will extend this to other e-commerce service providers as well.
The industry also had to come to terms with the impact of the debt moratorium announced by the government, which was a national need. This is where SLBA played a key role. The first-day P&L impact of the moratorium was going to be significant so we had to negotiate with the regulator on the interest rate that would apply on the equated monthly instalments during the moratorium to be collected once the moratorium ends.
There were several grey areas and the proposed moratorium could have severely limited the banking sector’s ability to drive economic growth in the medium term. We also had to clarify the treatment of bad loans provisioning and risk models about exposures with the regulator, audit firms and the accounting standards setter the Institute of Chartered Accountants of Sri Lanka.
We had countless meetings with banking executives and others to quickly fine-tune the moratorium and related operational guidelines. These are black swan kind of events that needs critical thinking and strong leadership to steer in unchartered territory.
(Reported by Devan Daniel, additional reporting by Mahadiya Hamza; COLOMBO, 14 July 2020)