‘High taxes hindering progress of banking sector’ - Saliya

With the expected resurgence in the Sri Lankan economy, there’s no doubt that the banking sector, one of the most dynamic and vibrant sectors of the economy will soon witness a mix of opportunities and threats in the delivery of the island’s required financial services. In this context, The Bottom Line in its maiden issue that bundles free with The Nation is delighted to publish a recent interview with one of Sri Lanka’s most senior bankers, Saliya Rajakaruna, Chief Executive Officer and Director at Nations Trust Bank (NTB) who counts over 30 years of both local and foreign experience
Here are excerpts from the interview

By Azhar Razak

Q: There’s this grievance among the bankers that the current tax structure is hindering the growth of the banking industry with banks currently paying an effective tax of around 55 percent. What is your opinion on this?
Yes, you are right to say that the taxes Sri Lankan banks incur are fairly on the high side because we not only bear the corporate tax but we also have to pay the financial VAT. So when you put both together, it takes out quite a substantial portion of revenue that could be retained by the banks. What it does is curtail the level of reinvestment that could be otherwise re-employed, and be it technology or any other improvement while the other disadvantage of these exorbitant taxes is that banks are also unable to carry their customers for longer periods when they (customers) enter into difficulties. So, since we are entering a post-war scenario and development holds a key to our future, it would be ideal if the government could remove the financial VAT imposed on us and let us only pay the corporate tax. This would help us to focus on capacity to provide good long-term financing and carry the customer over the bridge in any given situation.

Q: Do you, like many other senior bankers in the country also believe that the banking sector needs some consolidation so that they could work with more capital as lack of capital is presently hindering the growth of the industry?
Yes, to some extent, consolidation may help as it could obviously attract fresh capital and banks could improve returns due to the scale it could create. And since the cost to income ratio of the local banking sector is somewhat on the high side, banks presently need to service more volumes to survive and consolidation may help since you could probably put more volumes to your asset base. But for that to happen, banks should also be able to arrive at a common ground to work with which is not easy. There is also other ways that banks may be forced to take up consolidation if say the Central Bank increases the minimum capital threshold which is now about 2.5 billion to something higher which might compel the banks to consider the option or else a decrease in the talented workforce since competition for people is high as we now have, by and large, an ageing population with the propensity for young people to migrate also high. Sri Lanka has been often criticised for operating with too many banks in a smaller economy but if you take countries like Italy, Spain or Germany they also have too many players and I don’t think all of those guys are profitable. So, if there is a regional or global initiative then consolidation might be implemented. And remember, if you apply this theory, you will also end up with only a few banks which could reduce market competition and, in turn, lead to a reduction in efficiency and productivity levels in the long run.
Meanwhile, there are also other alternative ways to improve your revenue without having to consolidate. For example, banks could try to bring processing volumes from international markets to Sri Lanka. Simple processes such as processing of insurance claims or credit card applications which costs like two to three US dollar cents per $ of the claim, if you can bring that claim cost and processing volumes by relocating into Sri Lanka, like what banks like HSBC is doing here, it is possible that our revenue could grow. It is not only a matter of the costs side; it’s a matter of the revenue side as well.

Q: Presently, smaller private banks like NTB are not able to service the rural population due to the high cost of setting up a branch in those areas and are, therefore, missing out a larger number of transactions? What is the remedy you propose for this?
Yes, in Sri Lanka only about 20 percent of the population is urbanised while the majority 80 percent is still rural. But, we have set up our business focussing on a targeted segment of people. For us, we are not going to access the rural market because the basis of setting up this bank is not to do that, but to provide banking facilities to the urban peoples and some of the corporate names. From our business point of view, we are not targeting the majority based in our market. The capital that we have put in is aimed at achieving returns servicing focussed customers. But you are right, we are missing out a lot. But to do that we have to look at ways, tie-up with some Micro Finance Institution as it is simply too big of a market to ignore and that 80-20 percent is going to change over time as Sri Lanka develops and otherwise, our name will not be known to many people. But for the moment, I believe that you can still survive to the extent that you set up your business focussing on certain sections of the society.

Q: As a banker who has had a lot of foreign exposure, what do you think about the use of technology by our banks, both private and state owned?
There is room for improvement. However, investing in technology is not easy as it is very expensive business and you need to keep on upgrading with new developments. That is one reason that banks also need to keep their margins high to finance these kinds of things and also to prevent risks that you have to deal with. Margins were sufficient in the good old days but now they are becoming thinner due to competition. As far as technology is concerned, I am sure we will improve with time.

Q: Last year it was revealed that there was a ‘breach of procedure in forex trading’ which cost NTB a staggering Rs. 800 million while the Bank’s CEO and the Deputy had to pay the price. What steps have you taken since your appointment to prevent such a situation recurring?
Yes, we incurred the loss last year and we used profits achieved in the fixed income securities account to offset it. Going forward, we had to make quite a few changes and I am also a part of that change. Since then, there has been a change in people, processes and controls. The major change we did was to introduce a treasury middle office whereby transactions done by the dealers in the Treasury are reviewed as they occur on a concurrent basis by the Treasury middle office. We have also separated the settlement so that the people heading the Treasury do not do the monitoring and the settlement. They are now involved in different functions of the business as opposed to what they did earlier. We have given them dual responsibilities to be equally responsible for ensuring that the Balance Sheet is properly funded and at the same time maintaining liquidity. Liquidity and funding is now on the Treasury in addition to profit motive.
On top of that, we have a strong review and audit process. The Board has put in place a Board Risk Management Committee where we have recruited senior people to run these businesses and there is a kind of an independent Risk Management Unit. We have also established operational controls so that every business unit has an operational risk person who looks at the processes and the procedures in their own businesses and reports outcomes to a centralised risk person looking after operations right across the bank.

Q: Has the Monetary Board of the Central Bank of Sri Lanka (CBSL) concluded its audit investigation on NTB into the breach of procedure? Would the bank be liable to a penalty if it is found guilty?
No, they haven’t finished their investigations. They audited us sometime back and we are in regular dialogue with them and we have corrected certain processes and explained them how we do things. There is a forthcoming statutory audit and they might come to a conclusion in the next few months. But it is very unlikely that we will have to pay a penalty.

Q: What are the bank’s future plans on expansion, investments etc?
In the last few months, we have gone to the North and East by establishing branches in Vavuniya, Batticaloa and more recently Jaffna. We have 40 branches now and we are planning to open another 2-3 branches by the end of this year. We have also not been in the pawning businesses on a larger scale. Pawning will be our focus and we would like to expand on what we have started in a small way in various locations. But I am not sure whether it’s going to be good businesses since the prices of gold are looking very volatile. We are also thinking of concentrating on offering personal loans since to a large extent our retail branch network was in the past focussed on deposit generation. What we want to do is to target professional people such as doctors, accountants and engineers, and offer some packages.
And then we also want to tap the Small and Medium Enterprise’s (SMEs) since we already have quite a bit of volume from that market coming in as most of our leasing businesses are with them.
Another aspect from a corporate banking point of view is Trade Finance because we have acquired skills from new people and we would like to leverage that to see how well we can position ourselves as a Trade bank. This is important for us because since Sri Lanka is mostly a trading nation with a lot of traffic flowing in both directions.
We would like to do a little bit of investment banking. Already, we are a major margin provider to the stock market. We have something called a margin trading book where we provide customers who understand the market certain credit lines for them to invest in the stock market. It is on a highly secured basis and we have been in this business for quite some time.
Last but not least, we would like to become a more equity type and fund managed business to call ourselves an integrated financial services company.

Q: With the expected retail boom in Sri Lanka, the credit card market in Sri Lanka is poised for growth as well. However, there are security issues that will arise as a result of larger transactions being made either online or at POS terminals. How do you hope to handle it?
I still think that our people have not still inclined to credit cards at the moment. I think people are also not using one single form of payment and due to this reason no single card is getting all of the businesses. People have got averse to credit cards after what they witnessed on a global scale where you borrowed in excess of your capacity. I think we should also not encourage the trend as we are better known to be savers.