- Says banks should reflect on prevailing crisis with business continuity vision
- Should target increasingly tech-savvy and demanding customer base to stay relevant
- Aggressive upgrades of customer experience and workforce infrastructure expected
By Shabiya Ali Ahlam
The local banking sector will continue to witness further challenges in its path towards any progress. However, despite the hurdles faced, the industry must look at supporting businesses and individuals by aligning its current operating model to the ongoing crisis, global advisory firm KPMG said.
“Apart from the natural progression of fintech, banks will need to reflect on the prevailing crisis with a business continuity vision to be able to face such inevitable adversity again,” said KPMG in its latest Sri Lanka Banking report.
It stated that the prevailing times stand as a testament to the importance of stress testing of banks as they determine whether the financial institutions have sufficient capital in order to withstand the impact of adverse economic conditions.
According to the advisory firm, it is the banks that have adapted and embraced fintech over the recent past that are reaping its benefits as the nationwide lockdown has made consumers compelled to use online banking in order to meet their liquidity requirements.
“To stay relevant and cater to the increasingly tech-savvy and demanding customer base, the financial sector should respond with digital-base customer experiences and smart banking which will soon outdate the current infrastructure in place such as physical branches and ATMs,” KPMG said.
It added that while the digital transformation efforts have been accelerated during the crisis to increase accessibility, banks are providing solutions to customer transactions while operating remotely thus creating opportunity to convert the traditional customer to a modern and digitally-enabled one.
The firm also elaborated that it expects banks to aggressively upgrade customer experience and workforce infrastructure to promote flexible working arrangements and streamline decision making.
As banks now operate in a very fast paced environment, KPMG stressed the need for the institutions to adapt to the daily changes and should pay attention to its associated risks areas such as strategy, technology, operations, third parties, regulation, forensics, cyber, resilience, data leakage, and privacy.
“Adapting to implement these controls will be critical to its sustainability. The current economic environment can be the facilitator to increased focus on these areas,” it advised.
Sees opportunity for sector consolidation
The series of measures that has been brought in by the Central Bank (CBSL) and the market forces to cope with the ongoing pressures of the global pandemic, could lead to a consolidation of the heavily fragment Sri Lanka’s sector, KMPG said.
The advisory firm stated that a move in that direction would result in economies of scale alongside easing the burden of maintaining high capital and liquidity parameters stipulated by the regulator.
It the latest Sri Lanka Banking report, KPMG said that while it expects the banking system to be resilient towards the COVID-19 crisis, as it has been in the past through various other crisis the country has faced, it cannot under estimate the unique situation where the COVID 19 has impacted the entire world.
The sector continues to be concentrated with large banks, namely, Domestic Systemically Important Banks (D-SIBs), comprising of Bank of Ceylon (BOC), Peoples’ Bank (PB), Commercial Bank and Hatton National Bank (HNB) accounting for a 53.8 percent of industry assets as at end 2019, with the two state banks (BOC and PB) accounting for a 34.2 percent share of total industry assets.
“The banking sector of Sri Lanka, with a total asset base of Rs.12,522.7 billion and a net loan portfolio of Rs.7,922.9 billion as at 31st December 2019, has come under immense pressure as the pandemic proliferates across the globe and impacts various sectors,” KPMG pointed out.
With the consumption, construction, wholesale and retail trade and manufacturing sectors having accounted for 18.4 percent, 15.6 percent, 14.2 percent and 10.6 percent of total loans disbursed respectively in 2019, it highlighted that these are some of the sectors that are heavily exposed to the lockdowns triggered by the COVID-19 pandemic.
“The D-SIBs are sufficiently capitalized and have maintained liquidity to remain resilient through the aftermath of COVID-19, despite an expected negative impact on asset quality and profitability. The smaller banks are expected to bear the brunt of the pandemic as they are less able to withstand the implications of moratoriums, NPLs and liquidity crunch,” KPMG said.
The government implemented several measures to offer regulatory forbearance for banks on areas such as capital adequacy requirements, minimum capital levels, recognition of NPLs and impairment, and the declining profitability is expected to cause stress on capitalization levels across the next 12 months.
The CBSL also provided some breathing space in the form of extending the deadline to meet the minimum capital requirement for LCBs of Rs.20.0 billion and for LSBs of Rs.7.5 billion, by two years to December 31, 2022.
According to the advisory firm, without the relief it would be challenging for the banks that have not met the criteria in the current circumstances.