“I want to leverage our capital and make the best out of it”

May 2016

Aravinda Perera, Sampath Bank’s managing director, shares how he is leading the bank in executing sustainable strategies and leveraging on capital growth, people, and technology to respond to challenges in Sri Lanka’s banking industry.

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Here is the transcript of the video.

Emmanuel Daniel (ED): I am very pleased to speak with Aravinda Perera, the managing director of Sri Lanka’s Sampath Bank. Sampath Bank is one of the mid-sized banks in your country? Under your leadership in 2012, you have taken the bank on a journey. What did you inherit when you became the chief executive in 2012?

Challenging beginning
AP: I have been working in Sampath Bank for the last 29 years. I knew everybody and everything about the bank and that was a very positive thing. Most importantly, I knew all the top customers of each branch or head office by heart, and everybody was known to me. The bank was very conservative until 2010, when we only had 100 branches even though the franchise was 22 years old. We went on a very rapid expansion of branches from 100 to 200 in basically two and half years, with our number of staff increasing from 2,000 to 4,000. So, I inherited a bank which roughly half of its branches and staff are new.

ED: That kind of growth would have put a lot of pressure on the cost side of business?

AP: Our cost-to-income ratio went up drastically and of 100 branches, many were still making loss. But my first year in 2012 was really good for both internal and external reasons. We ended up with roughly more than 50 percent growth in profit, which is very good. However, I inherited a really big problem in terms of gold backed loans, which is around 25% of our total portfolio.

ED: How did that happen?

AP: Over a period of time, we made a lot of money out of that and we thought that the gold prices would remain at the same level. Our loan-to-value ratio was about 80% and no one expected the value of gold to drop by more than 80%.

ED: So, the central bank called you?

AP: Yes, and we had to write-off roughly about double the profit we made in 2013 in the next two years. The biggest challenge was how to move from a relatively high risk of 24% to below 10%. Right now, it is below 3%. What we did was to expand our franchise, especially the SME and Retail in a very aggressive manner, allowing the gold to drop little by little, not only in percentage but also in absolute terms. I inherited a bank which has a good NPA. 10 years ago, it was about 11%, which is high by Sri Lankan standards. When I inherited the bank, it was at 3.5% and right now it is about 1.6%.

ED: What involved this kind of aggressive reduction of NPLs or NPAs? Was it by chance, corporate loans, or were they related to the gold?

AP: Gold was separate. What we did were two things. Number one, we were letting around 200 of our branch managers to grant credit. We said, “no, you cannot give credit. Credit will be centralised in the regional managers’ offices.” From 220 branch managers, we brought it down to well-trained 22 regional managers. Second, we were not giving enough attention to loans that have already gone bad. We tried to take them to court for five or six years. So, we told our lawyers and our recovery people, “look, friends, now it is a different game. You will not talk of a capital settlement in full and part of interest year on.”

You recover a loan, from the next day that money can be invested in another loan instrument earning interest. So, we went on both sides, both absolutely that the amount of –

ED: You were doing this with the staff that you had and did not hire new staff?

AP: No. We brought regional credit people into the recovery department to do that change, so it worked very well. Also, we have a system that if a loan in arrears has reached one month, everybody will know. A letter will be generated by the system, which will be sent to the branch manager.We were very aggressive on that. Every month, I and my juniors will look at them. And we really did a good thing, bringing it down to 1.6%.

ED: So, they were mostly consumer loans as opposed to corporate loans?

AP: Yes, I think there were only few corporate loans, while a large number of small loans were there. We managed to give them concessions in terms of interest, and agree for longer and lower repayments.
ED: Did you ever think of lumping it together and securitising it?

AP: We do not have here any agents or a company who will take over. We looked at it but there were no buyers at that moment. Sri Lankan legislation is also not very clear on whether somebody can take over and assume the responsibility of recovery, not just the accountability, but also the legal ownership of such assets

ED: So, you implemented a lot of backroom processes that includes using the people you have while hiring people from the outside so that the integrity of the processes is run well. What have you achieved so far?

AP: We centralised most of the branch back office operations into a thing called the Network Service Centre or NSC. This started with the check truncation and thereafter continued. Most of the back office functions are done in our office in Colombo.

ED: What do you think are the top three or five challenges that you will face?

AP: We are moving towards a technology unsure of what it will become in the future. It is a big question whether the brick and mortar branch will continue or not. In January 1 last year, we had 4,000 employees and our head came to me and said we would probably take another 400 people this year. Without thinking anything, I said no and told him that I want to end the year with less than 4,000 people. We ended the year with less than 4,000 people, and we brought in the whole team making sure we get the best out of our team.

ED: Are you an engineer or an accountant by profession, because you have the instinct of an accountant, which is cost management?

AP: Yes, I am a “numbers” man. I am a mechanical engineer and an accountant by profession. My first degree was in engineering and then I completed my management accountancy.

Leveraging capital amidst banking competition
ED: Lately, a couple of banks changed ownership and they the banks are generally competing for capital in Sri Lanka. In the course of this competition, how do you position your bank relative to the nearest competitor?

AP: We are number three among private commercial banks, far from the number four, and we are comfortable from the bottom side. The top two banks have been there for more than 75 years and we have existed for only 29 years, so there is still a gap to catch up.

ED: Legacy environment to release and make your staff work independently, freely, and so on?

AP: Yes, we say that the transformation of the banking industry in the country started with Sampath Bank in 1987, so it goes in line. I probably have the toughest. But then I have told myself, “look, I want to leverage my capital and make the best out of it.” If I go for a merger or a buyout or something, then obviously my shareholders will support me.

ED: Would you please explain how your fee-based income grew very strongly, from 20 percent to 33 percent to 40 percent in 2015?

AP: We started earlier than 2015 and we got the result last year. We realised that we were having a net-to-income ratio of at least four percent, which was not going to hold true because of the competition and customers becoming aware of this. We worked on this for a long time because our income comes from trade business and imports, which are small in size. I believe these non-interest income is as high as the other two banks that I mentioned earlier. We are very strong in other things like remittances, and credit cards.

ED: All of these are fee-based and electronically driven. What is your view on the onslaught of intact players coming into the marketplace and in your business?

AP: So far it has been okay, like the telcos coming in and trying to get into payment business. We also have to go along with them and have our own programme as much as possible. Our products are in place, but the delivery is somehow an issue because the people look for a delivery next to their home. You cannot have branches everywhere, so we are at a slight disadvantage vis-à-vis telcos, but we are now working with them..

ED: Are you a first mover advantage organisation or do you wait for technology?

AP: We always have the first mover advantage. From 1987, some parties have considered us the most innovative bank in the country.

Driving the bank through regionalisation
ED: And that’s a good title to have because otherwise it’s difficult to influence the perception of people who don’t know anything about the bank. How international are you and how many branches do you have outside the country?

AP: Well, about 78 is a go. A non-banking financial institution started by a Sri Lankan company in Bangladesh almost went bankrupt. We went there, restarted the bank, we had 22% shareholder, and we still have 9%. So, we brought back nearly about 4,000% of what we initially took. Right now, the company in Bangladesh where we own 9% is doing extremely well. They are also talking to us about another exciting option and we are looking at it. Meanwhile, we went to Myanmar and set up an office.

ED: What is driving this desire for regionalisation? Is it because the business in your home country is booming?

AP: Sri Lanka is a small country and my competitors are very good and very competitive. Although we take a large market share, the pie is not growing fast enough.

ED: Do you consider yourself someone who can leap frog some of the new technologies coming on stream, or do you think that having a traditional approach where a large player like IBM put their computer in your organisation is a more effective strategy?

AP: I think we leap frog, since some of the options that we have had long years ago are still not available in places like the U.S. or the U.K., and we have done all of that. In 2000, we went with Infosys and set up a separate sysadmin unit, which is unique, at it is run by bankers with a little bit of experience in IT. Their interest is not IT but banking products and services. So, we have done extremely well in that area.

ED: If I visit your bank today, I will see a bank with customers. At the same time, there is a lot of internal marketing to make the organisation even more customer-centric.

AP: You are right. There is some more to be done. I need to get my customers to do my work, for example, opening their accounts. If you do it at home, I just have to get your signature when you come to my branch, and that will be the best thing that I can do. Work is being done in that area as well.

ED: Why is it that despite all the good work being done, the respected ranking agencies and the analysts are still thinking that this is a small but difficult organisation?

AP: The rating agency is not happy with us because of our capital situation. They said our capital isn’t much above the minimum requirements, but as compared to our competitors, we are not exactly great. I have no argument against that, but my mandate from our shareholder is to make the best out of it.

ED: Is your relationship with the board strategic or based from day-to-day things?

AP: Strategic, but we cannot escape the day-to-day things. It is usually done during the monthly board meetings and we have other sub-committees that also work with me. They are very good in giving the guidance that we require.

Growing through people and technology
ED: Going forward, what are three priorities that you want to achieve maybe this year or in the near future. Give us three criteria that you have set for yourself.

AP: I think the first thing is to make sure to look at the people factor. My staff are very young as compared to other banks in Sri Lanka. If technology evolution changes the scenario, I cannot lay off 1,000 people. For a year, only 25-30 employees retire and that is not enough. That is number one.

What we are planning is to make technology take off some of my staff away their normal day-to-day, but make them marketers and go out to the market. Number two, we are also undergoing a major upgrade in our IT system within the next 12 months. That’s going to be very important.

Third, I think as you quite rightly asked me, regional presence now looks like a very good option. So, we want to go to a market which is not as developed as Sri Lanka, so that our expertise and tech savviness will be of much help.

ED: Which is a more useful way of growing the franchise. It is a very organic way of growing the franchise.

AP: Exactly, yes.

ED: One day, when you leave the bank, what do you hope will the staff say about you?

AP: What I hope is that they will say “he led the bank into a good situation, leaving us with hopes.” “He’s a very friendly man, he looked after us, he ensured we did our exams, and he knew all of us.” “He was approachable.” These are just some of the things I hope they will talk about me. But if they say “he worked for the future,” then that will be the best I could look for.

Proper governance and consolidation
ED: Tell me more about Sri Lanka. The new government has placed rules on investing for foreigners, giving clarity or transparency on foreign ownership. Where is Sri Lanka now in terms of rebuilding its infrastructure?

AP: Sri Lanka has been rebuilding its infrastructure, especially the low-net worth, for some time, and it is about one-third done. The new government came and delayed it for some months. They are reviewing the contracts. Colombo port city is done. Hotels came and are still coming. So, infrastructure is in place. There will be certain new additions to the Colombo airport and we already have a substitute airport in Hambantota. In addition, we were used to having only one port but we have now two ports.
They took out a certain amount of risk. After this government came, transparency and law and order became much more apparent. So, we are in for a very good, positive thinking, but unfortunately, we are not yet seeing things happening. Probably in the corporate, locally, and other businesses, but we’re still waiting to see because we do have a certain issue in having a huge debt problem which the government is trying to sell by talking to IMF and ADB. If those things are in place, I think we will be ready for another good FDIA involvement.

ED: Do you think that Sri Lanka has too many banks and that consolidation must happen at some point?

AP: Consolidation is not the issue in the Sri Lanka’s banking industry. There are some small banks who are trying to come out and it is going to be difficult. When Sampath came in 1987, we became quite larger within a short period of time. Some small banks are finding it difficult to do that. So, their owners will have to make a move and say, “Look, we want to go with somebody else.” I don’t think anybody can push them to do that since it will come from themselves to make sure that they want to consolidate. But with the non-bank financial institution area, the previous government started on that, we are halfway through probably.

ED: Why would non-bank financial institutions be consolidated as opposed to banks?

AP: Well, a couple of NBFIs failed to deliver the customer deposits. They are endowed and the central bank had to come and help them. The central bank probably thinks that it cannot continue and they want stronger players to buy smaller players so there will be lesser numbers to look at.

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