Sri Lanka’s banks are not just having to contend with the coronavirus pandemic; smaller competitors and rumours of consolidation pose a threat too. However, as Kimberley Long reports, they enter this worrying time in a strong position. 


After enduring decades of civil war, the instability of a coalition government, and the devastating Easter Sunday terrorist attacks in 2019, Sri Lanka had been hoping the election of a new prime minister would be the catalyst needed to bring confidence back to the economy. 

It was widely speculated that the result would see president Gotabaya Rajapaksa of the Sri Lanka People’s Front party take control of parliament with a two-thirds majority, ending a power-sharing coalition that many believe has stifled the country’s capacity for change in recent years. 

However, as with many plans made globally for 2020, the spread of coronavirus caused the postponement of the elections scheduled for late April 2020, and no new date has been given. 

Protecting health and finances

In the face of these challenges, the government has introduced several measures to support the country through this difficult period. Sri Lanka moved to stem the spread of the coronavirus by imposing a curfew on certain urban areas on March 20, which has since been expanded across the country. 

Ajantha de Vas Gunasekara, group chief financial officer at Sampath Bank, says: “Sri Lanka has shut down due to the Covid-19 pandemic. Five districts are under an indefinite curfew, and the Western Province [where business centre Colombo is located] is one of them.” 

The government measures taken at the time of writing have so far proven effective in preventing the nationwide spread of the virus. “The only positive so far is our government, health sector and the security forces have thus far managed to control the situation in comparison with many developed countries,” adds Mr de Vas Gunasekara. 

Moving to protect the health of the population was not the only measure introduced. The government has implemented assistance to shore up struggling aspects of the Sri Lankan economy. Mr de Vas Gunasekara says: “The government has introduced many facilities to the affected parties, including a Covid-19 moratorium package. We feel that these will help the Sri Lankan economy to pick up once we get over the current health crisis.” 

The measures include allowing the domestic systemically important banks (D-SIBs) and non-D-SIBs to draw down on their capital conservation buffers by 100 basis points (bps) and 50bps, respectively, to support credit flows and borrowers impacted by the virus. 

Bingumal Thewarathanthri, CEO of Standard Chartered Sri Lanka, says: “To inject dollar liquidity, the Central Bank of Sri Lanka [CBSL] offered a $245m swap arrangement. It also created a SLRs50bn [$260m] Covid-19 fund to support interest subsidies of fresh loans granted to the impacted sectors.” 

The measures have also been implemented to support the country’s smallest businesses. Jonathan Alles, managing director and CEO of Hatton National Bank (HNB), says: “The first directive by the new government to support the revival of the small and medium-sized enterprise [SME] sector and this programme is extended until the end of December 2020.” 

SME support 

Prior to the impact of coronavirus, the government had implemented several policies to bolster Sri Lanka’s economy, which may well prove to be a lifeline to companies that will be further affected by the virus. 

SMEs had been given a helping hand through a moratorium on their loans. Announced at the beginning of 2020, companies in the manufacturing, services, agriculture and construction sectors were able to apply for this support directly from their bank by giving details of how they were planning to use the extra capital. The move aimed to curb the rising levels of non-performing loans in the country, which had increased to 4.7% of loans at the end of 2019, up from 3.4% at the end of the previous year. 

There was a high level of interest from companies. S Renganathan, managing director and CEO of Commercial Bank, says: “We saw 3000 applicants from SMEs for the government’s repayment deferral scheme. The plan is for them to use the cash held back as an opportunity to revive their business. In their applications, they needed to demonstrate how they will use the cash flow retained.” 

However, Dimantha Seneviratne, director and group CEO at National Development Bank (NDB), has a note of caution about the changes being made. “Any additional funding guarantees from the central bank might become a credit risk for the banks,” he says. “The banks are involved in inviting their SMEs customers to have an extended repayment period to ease working capital. While the banks are committed towards the support scheme introduced by the central bank, banks are also taking a credit approach to decide who to give it to.” 

Providing SME support has been the backbone of many banks’ business in Sri Lanka. Mr Renganathan explains that Commercial Bank has supported SMEs with the development of its Biz Club offering, which provides a relationship management service similar to that for corporate customers. “The agriculture and microfinance business needs a different approach than that supporting the SME and corporate businesses,” he says. “We can encourage this [new approach] by providing microfinancing on digital platforms, which are developing fast. These services also find greater reach when they are offered in multiple local languages.” 

Focus is also given to businesses with a specific set of requirements. Mohamed Azmeer, CEO of sharia-compliant Amana Bank, says: “The bank has an SME focus, which follows the strength of the Sri Lankan economy, with about 70% of our profits coming from SMEs. Our model is to provide strong business support and give the same services to corporates and SMEs alike. This is an important value add for SME customers.” 

Tough regulations 

Sri Lanka’s banks have questions about how their own business will come through the current downturn. However, the regulators have put the country in a relatively robust position by adhering to strict international rules. 

The country is up to date on the implementation of international banking standards, which sets it apart from other countries in the region. Ravin Basnayake, country officer for Sri Lanka at Citi, says: “Sri Lanka has got ahead of some of its neighbouring countries by becoming compliant with both IFRS9 and Basel III. The central bank is aligned with global best practice. It has also issued legislation on digital banking; it is very progressive.” 

Further to this, the CBSL announced in January 2020 that it would introduce a new banking act in 2021. Changes include the introduction of a single type of banking licence for licensed commercial banks and licensed specialised banks. Furthermore, offshore and domestic banking units would have to be merged into a single business. 

Banks that were having difficulty in meeting all of the requirements have been given some leeway due to the current circumstances. HNB’s Mr Alles says: “The new banking act and the CBSL guidelines specified the minimum capital requirement for banks as SLRs20bn and this was to be met by the end of 2020. However, along with the Covid-19 relief scheme, the CBSL has extended this timeline up to the end of 2022.” 

Bank consolidation

Some of the country’s smaller banks are feeling pressure from these strict rules. Sri Lanka is home to a sizeable banking sector, serving its population of 21 million. Rajendra Theagarajah, managing director and CEO of Cargills Bank, says: “There are 31 banks in Sri Lanka, which makes it a very crowded and inefficient banking market.” 

HNB’s Mr Alles outlines the breakdown of the banking sector, saying: “Sri Lanka has four domestic D-SIBs, consisting of two state banks and two private commercial banks. In addition, there are four other private commercial banks which, together with the four D-SIBs, account for approximately 90% market share. The balance is distributed among the other commercial banks operating in Sri Lanka.” 

Having so many banks jostling for the same business has an impact across the whole sector, and one solution already being seen elsewhere in Asia is consolidation. The possibility has been mooted before in Sri Lanka in January 2014, with the focus on removing the smaller banks through absorption or growth. While progress was made on identifying potential banks for consolidation, it did not take place. Many of the bankers spoken to for this article raised the possibility of consolidation happening this time around. 

Senarath Bandara, general manager and CEO of Bank of Ceylon, says: “Consolation is a topic that is being discussed again, as small banks are wary of the minimum capital requirements that have come with new regulations.”  

Reducing the number of banks will also not be as simple as focusing on providing banking licences to solely domestic banks, however. Mr Theagarajah at Standard Chartered Sri Lanka says: “Foreign banks have an important role in this as they can provide access to capital markets and foreign investors.” 

Any changes that do occur will likely come from the central bank, and its governor, WD Lakshman, tells The Banker there are a few banks that are currently under consideration for consolidation. 

Challengers and innovators 

Yet even with this excess of banks, Sri Lanka's banking sector may still see new entrants. Citi’s Mr Basnayake says: “Sri Lanka is an overbanked market that is very competitive but offers thin margins. And there is an emerging digital bank sector that will put further pressure on the earnings potential of the existing banks.” 

With so many banks offering similar services through the same channels, there is space for those that are offering something different. Mr Theagarajah says: “The challenger banks will come in and challenge the status quo. They can use digital knowledge and artificial intelligence to challenge the system.” 

Sri Lanka has been lagging behind its regional neighbours when it comes to adopting digital banking technologies. To catch up, the CBSL announced that 2020 was to be the year of digital transactions. While the impact of coronavirus has knocked many plans off course, moving customers towards using digital channels could help the CBSL to meet its targets. 

There is a long way to go. Mr Basnayake says: “Retail payments are [mainly] cash based, with about 65% of transactions still made with cash. The central bank is working on changing this, and has pushed for the use of mobile wallets.” 

At present, the digital banking space is dominated by offerings from the incumbent banks. Mr Alles says HNB has been expanding its digital offering with the creation of an e-wallet. “Solo was the new addition to our digital banking space and the first phase includes QR code-based payments. Phase two will include more lifestyle options and is expected to be completed in 2020,” he adds. 

Move to mobile

Faced with closed stores and the self-distancing measures required to combat coronavirus, the present time is seen as an opportunity to push forwards with mobile banking. Mr Alles says HNB’s mobile and internet banking systems are being upgraded, and are driving payments through the digital channels. 

In an effort to push through to the next phase, the central bank has been promoting a regimented approach to the adoption of QR code payments. “Mobile payments in Sri Lanka have grown by 400% since last year, but came from a low base,” says NDB’s Mr Seneviratne. “The next step is the implementation of QR codes. The central bank has overseen this to create a platform standardised by regulation. This has ensured interoperability. Once live, it will help improve the efficiency of payments.” 

It could have a big impact on the micro and SME area. Standard Chartered’s Mr Thewarathanthri says: “The country’s lockdown has generated an increased demand for digital payments. We believe more small vendors in Sri Lanka will sign up for QR-based payments to allow for transactions over mobile devices. Digital transactions will make it easier for consumers to make payments to the small vendors.” 

The move towards digital might also bring more consumers into the formal banking sector. Even with the high number of banks in the country, these are often based on bricks-and-mortar locations in the larger towns and cities. Mr Seneviratne says: “Sri Lanka has a large unbanked community; banks are reluctant to go into the more remote areas because of the costs associated with traditional banking models. Digital banking changes this. NDB has been deploying its Bank to You proposition, which sees staff go out to the customers directly. We have been focusing on the trishaw drivers, who are often unbanked.” 

Sri Lanka is hoping that it will emerge from the crisis of Covid-19 with a strong banking system in place, and consumers who have adapted to the challenge with digital adoption. These changes may well be what is needed to get the country on track towards economic recovery.


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