Banking Sector of Sri Lanka

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					                              Banking Sector in Sri Lanka

Sri Lanka's banking sector is sound amidst a global rout thanks to early regulatory action
taken to safe guard the banking system. When all the other countries were expanding credit at
very high rate, banking was given massive amounts of loans to fuel the housing as well as the
land prices in Sri Lanka.

As a result of that Sri Lanka was able to smoothen and safe guard the banking system before
it could form and have disastrous consequences in the economy. Economic analysts have said
that Sri Lanka's economy is mostly damaged by government action, usually central bank
accommodation of fiscal deficits. Printing money to plug deficits causes interest rates to fall
(financial repression), which in turn leads to high inflation and balance of payments

The banking sector in Sri Lanka at present needs a complete overhaul to make it globally
competitive. Clearer regulatory guidelines are needed to cover changes in ownership in the
banking sector and to handle the implications of mergers and acquisitions

The industry is over-banked and saddled with high costs, especially for distribution, that
prevents the optimization of economies of scale. This in turn makes it difficult to attract new
investments into the sector.

Banks need capital and investor reluctance to invest is because of the lack of scale of
individual banks. The way out of this predicament is mergers and acquisitions need to happen
in order to build capital and absorb unforeseen losses and reduce fixed costs.

Though the island’s banking sector was largely unaffected by the global credit crisis as it was
not exposed to the risky practices that led to it, it does face structural challenges.

Return on investment is very low in Sri Lanka. The industry return on equity is around 13.6
percent, well below the inflation rate, which acts as a deterrent to attracting foreign investors.

Taxation on banking income is set at the rate of 60 percent, which is both punitive and
inequitable compared with other industries. Sri Lanka's overheads are among the highest in
the region. The banking sector needs some consolidation to reduce overheads and attract
                                 Evaluation up to 2011

As the effects of the financial crisis permeated into the Sri Lankan economy, a noticeable
indolence in the financial services sector was evident throughout 2009.

This was further aggravated as repercussions of financial fall-outs in the local industry were
disclosed in the early part of 2009.

Domestic financial markers that were somewhat volatile at the commencement of 2009
became more liquid and steady in the second half of 2009 and first half of 2010.

The Government’s post war economic development policies were lenient on the monetary
system and led to a declining inflationary pressures situation in financial market. Resumption
of capital inflows due to reduced risk and improved investor sentiment has given a positive
shock to the banking industry.

This article compares and contrasts the performance of lincensed Commercial Banks (LCBs)
for 2009 and 2010. Both public and private LCBs overall performance was comparatively
higher in 2010 compared to the 2009.

All of the key performance indicators showed positive growths in 2010. Summary of Key
Performance Indicators of 2010 and 2009 of Leading LCBs are presented in Table 1.

Financial markets were more stable with improved liquidity and declines in interest rates
from the beginning of 2010. The exchange rates remained more stable. Equity prices have
surged upwards during the year.

The banking sector sustained its earnings via an increase in investment income from
government securities and equities.

Almost all banks moved to long-term investments rather than short-term investments. On the
other hand they encourage short-term borrowings as it was less costly than the long-term

Overall drop apart from DFCC bank can be seen in total revenue compared to 2009 in 2010.
The main reason was the average drop in interest income by 10 percent to 15 percent in
almost all LCBs.

In the case of DFCC bank the results of 2010 included profit relating to the sale of Bank’s
shareholding in Commercial Bank of Ceylon PLC (CBC). Sale of Commercial Bank shares
have contributed Rs 5,282 million to DFCC Bank’s profit.
The main reason for the drop in interest income of all LCBs was the drop in lending rates
from 15 percent 18 percent to 9.29 percent - 9.76 percent range in 2010

Even though an increasing trend was visible in the growth in Advance portfolio of the banks
(Approximately 20 percent - 30 percent) but the interest income had dropped mainly due to
the decrease in Average Weighted Prime Lending Rates (AWPLR).

On the other hand LCBs concentrated on Government securities specially Treasury bills, of
which interest rates were decreased by considerable percentage. Details are as follows: A
material decrease in interest expense was shown in 2010 to 2009. (Averagely 20% to 30%
drop in all banks).

The decrease in the Average Weighted Deposit Rates (AWDR) was the main factor for this
interest cost reduction. It is clearly evident in the following table.

The deposit growth in 2010 (nearly 10 percent- 20 percent) has not proportionately increased
the interest cost in LCBs due to the drop in AWDR.

2010 can be considered as a remarkable year to increase LCBs profits. Apart from NDB and
PABC all other banks have recorded an increase in their profit after tax in 2010 compared to
2009 (Nearly 50 percent to 100 percent).

The same increase can also be notified in Net Asset Per Share, EPS, ROE and ROA. Further,
two State banks were able to sustain their market share on deposits and advances with slight

This year is also a blooming year for all banks since the government has given several
encouragements in its budget proposal. They are:

* Reduction of Corporate Tax from 35 percent to 28 percent and reduction of Nation
Building Tax (NBT) will improve profitability of most listed companies

* Reduction of Financial Services VAT (FS VAT) from 20 percent to 12 percent. However
such institutions are expected to create an investment fund that can be utilized to grant
attractive credit facilities including long-term loans at a lower rate of interest.

* Removal of debit tax will also have a positive impact on LCBs deposit growth.
                       Problems/ Challenges in banking sector

Due to financial crisis, the bank interest rates are low. So the banking customers go and
invest share market or buy properties rather than investing banks. This is one of main
problem that Sri Lankan banking sector have to face.

Banks were unable to attract more deposits since short-term deposit interest rates were less
attractive and customers tend to switch for more attractive investments such as
Capital/Money markets.

The developments in the banking field with the acceptance of new advanced technology
poses real challenges to bankers in the future. They will have to compete with intelligent
machines for the protection of jobs and be prepared to work in a virtual office environment.
The current competencies, skills levels and the preparedness of bankers are totally inadequate
for them to face these new challenges.

To face these challenges successfully, bankers have to develop a culture of continuous
learning for them. Such a culture will require them to change their present behavioral habit of
stopping learning altogether after they attain a certain position in life. Learning is a
continuous activity for anyone in the society. It is much more relevant in a society where
there is a rapid change in everything around the members. Banking being such a sub –
society, bankers has to learn continuously in order to remain productive in their respective

Otherwise, the bankers made of flesh and blood will have to work under intelligent machines
which are more efficient, knowledgeable and productive. As financial and technology
confidence losses mount due to various IT frauds, especially phishing attacks targeted at e-
banking customers, it has become imperative for Sri Lankan banks.

Information security specialists watching the Internet for latest trends report the acceleration
of cyber attacks carried out through fake web sites and forged emails on the banking and
financial sector, which accounts for many millions in loses to both banks and their customers.
The opportunity costs to the due to these attacks on the banking industry might be even
greater as widely reported attacks and the devastations left in their aftermath leave both banks
and customers fearful of integrating and embracing technology that can clearly deliver cost
savings and greater customer satisfaction.

 A weakness which can be seen in many individuals in the present society, especially in Sri
Lanka, is that they stop learning new skills after they reach certain stability or position in the
organizations they are working. They give more priority to work and less priority to skills
build up.
           Further Development to overcome the SL Banking sector

As financial and technology confidence losses mount due to various IT frauds, especially
phishing attacks targeted at e-banking customers, it has become imperative for Sri Lankan
banks, in the best interest of their customer's to be prepared to successfully counter cyber
attacks. To meet this critical challenge, the Cyber Security Drill Team of the Department of
Computer Science and Engineering of the University of Moratuwa in collaboration with the
Institution of Engineers Sri Lanka and TechCERT conducted a cyber security drill
exclusively for Sri Lankan banking industry.

ICT has also removed the physical barrier between customers and banks. Previously, any
customer desirous of receiving a bank’s service had to travel to the location of the bank and
present himself physically before a bank officer. But now, with ICT, he could contact his
bank from any place in the world relatively at low costs. Voluminous information could be
sent back and forth between the customer and the bank practically in real time at low costs. It
has improved customer relationships and accelerated the service delivery to them.

ICT has helped banks to store volumes and volumes of information relating to customers,
products and markets in digital form virtually at zero cost and retrieve the same in any form
they desire quickly and conveniently. It has improved the customer monitoring and reduced
the customer delinquency. Service appraisal can now be undertaken with more updated data
thereby helping banks to keep customers under constant surveillance. The true value of
information in decision making at appropriate times has been made possible by advancements
in ICT.

ICT that banks have been able to meet the three most requirements of their services: quality,
timeliness and delivery. With new and improved ICT platforms being made available to
banks every day, they have been able to improve the quality of their services and deliver
them to customers on time. While people working in banks and their knowledge are
important, without the new apparatuses available, such human capital becomes virtually non
– functional. An intelligent machine is always in an advantageous position compared with a
banker. It can learn new subjects quickly, acquire new skills and can upgrade itself in
response to the emerging needs. Its memory capacity and ability to retrieve information
stored therein quickly and efficiently are superior to the memory power possessed by

Since the banking industry undergoes the fastest change compared to other industries, the
continuous learning requirement is more relevant to bankers than to workers in other
industries. If bankers made up of flesh and blood desire to beat their new co – workers who
come in the form of intelligent machines, there is no other alternative except learning better
skills and becoming abler workers than those machines. Hence, the greatest challenge for
bankers in the future is to acquire new skills and knowledge on a continuous basis to make
them fit for undertaking new tasks and duties.

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