Sri Lanka’s economy has entered a new phase. All the key economic indicators suggest that things are moving in the right direction. Clive Fonseka, Chief Executive and General Manager of People’s Bank, the second-largest bank in Sri Lanka, shares insights into the evolving economy, the bank’s strategy shift and building a strong balance sheet and capital base to enable private-sector-led economic growth.
Fonseka explains how the economic crisis compelled the bank to change, beginning with a shift in its business model. Previously, People’s Bank’s business model relied on a network of 751 branches to mobilize deposits, which were in turn primarily lent to state-owned enterprises (SOEs). As of 2022, approximately 56% of its loans and advances were to SOEs. However, following the IMF-backed restructuring of SOEs, the demand from SOEs for borrowing from state banks has declined significantly.
As a result, Fonseka explains, People’s Bank’s exposure to SOEs has decreased markedly, from 56% of total loans and advances in 2022 to 35% in 2024. “We managed to do that at scale over a short period by empowering our branches and regional offices to focus on private sector lending, specifically targeting SMEs, retail customers, and corporates, which became our three main growth areas,” he says.
Recognizing that the necessary expertise might not initially be present at the branch level, the bank conducted extensive training programmes. These sessions covered how to engage with potential borrowers and included detailed checklists to guide staff through the process. The bank also established regional credit units within its 25 regional offices to support this shift. When a branch identifies a potential customer, it conducts the initial discussions and then refers the customer to the relevant regional credit unit. Staffed with credit experts, these units thoroughly assess the case and recommend appropriate financing facilities.
Additionally, the bank launched six export hubs nationwide to facilitate trade finance, a key requirement for SME and corporate clients in various regions. “Since our staff had previously focused mainly on deposit mobilization, we had to retool and retrain them for this new direction. These extensive training programmes enabled our transition towards a more diversified lending approach,” Fonseka explains.
Excerpts of the interview follow.
With the economy recovering, what are the most crucial priorities for a bank leader today?
Liquidity is the most critical factor. The profit and loss statement also matters significantly because no customer will place their deposits with a bank or financial institution that consistently makes losses. The third and equally important factor is capital. Ultimately, we must remain constantly mindful of liquidity, profitability, and capital.
Liquidity became a significant challenge for us in 2022 and 2023, particularly in US dollars and Sri Lankan rupees. At the time, the business model relied heavily on state-owned enterprises (SOEs), who depended mainly on state banks for funding. The state banks effectively absorbed losses incurred by these SOEs.
This model became unsustainable when the country faced a severe foreign exchange crisis. We had opened several letters of credit (LCs) for essential imports such as oil, coal, and fertilizer based on written assurances from the authorities. However, due to the broader economic crisis, the government could not honour those assurances, and we could not settle some of those LCs. We faced significant difficulties, particularly with foreign lenders, LC beneficiaries, and some of our top high-net-worth individuals and corporate depositors. At that point, we had to take extensive measures to develop repayment plans and provide assurance that we would address their concerns. It was an extremely challenging period, and no other bank in Sri Lanka was impacted as severely as People’s Bank due to the fact that our business model at the time was primarily that of an importer’s bank.
Our share of export proceeds and inward remittances was minimal compared to the volume of imports we facilitated. As a result, we were heavily dependent on the interbank market for foreign exchange. The bank encountered severe liquidity constraints when that avenue shut down due to the crisis.
At the time, our share of inward remittances was just 6%, highlighting the imbalance in our funding structure. Since then, we have managed to increase this substantially over the last few years with various strategic approaches to reward and recognize the expatriate community, whom we consider an invaluable customer segment. Also, we’ve doubled our export volumes from the 2022 levels in 2023 and then doubled them again in 2024. This year, we expect to see another significant increase.
Another key focus is the Profit & Loss (P&L) statement, which is crucial, especially given that the government is our sole shareholder. We must manage diverse stakeholders, including staff, pensioners, unions, and customers. Profitability is vital because stakeholders benchmark us against both state-owned and private-sector banks. Therefore, it’s essential to monitor the bank’s profitability closely.
Capital adequacy is another key factor, which has become even more critical due to the shift in our business model. While we previously lent primarily to SOEs, supported by valid treasury guarantees, the lending landscape has changed as we now focus more on the private sector. Lending to SMEs and corporates carries different risks, which means capital allocation is more demanding. As a result, maintaining strong capital adequacy is crucial.
What were the key lessons you learned as a leader?
The biggest lesson learned has been the power of a “can-do” attitude. Our staff is exceptional and highly adaptable. With leadership and training, our people can accomplish anything and have demonstrated as such. When you look at our private sector lending across all sectors, whether retail, SMEs, microfinance, or corporate banking, there has been a significant increase. Previously, we weren’t focusing that much on lending to the private sector. Now, we’ve extended credit up to our single borrower limit to some of the top corporates in the country. This transformation hasn’t been the work of just one department. It’s been a collaborative effort across all areas, working together towards a common goal.
What strategies and approaches did you, as a leadership team, adopt at People’s Bank to navigate the uncertainty surrounding the restructuring of Sri Lanka’s sovereign debt in rupees and dollars?
We didn’t have a substantial international sovereign bond portfolio. Our primary issue was the dollar exposure to the SOEs. As of 2022, People’s Bank’s SOE exposure was substantial, with the primary exposure being to the Ceylon Petroleum Corporation, followed by Sri Lankan Airlines, which had a lesser exposure.
Sri Lanka’s restructured international sovereign bonds were $12 billion, and here you’re talking of $1.1 billion for People’s Bank alone; that’s a massive amount.
Unlike the international sovereign bonds, when the CPC restructuring occurred, we didn’t receive the option to settle a part of the exposure in Rupees. As you know, during the international sovereign bond restructuring, local banks received 70% of the amount in rupees that were converted into treasury bonds. However, we didn’t have that option for the USD-denominated CPC debt. Instead, those got converted into longer-term US dollar instruments. Additionally, the Central Bank introduced a prudential requirement to convert 15% of such USD exposure as a special reserve, which wouldn’t count towards capital adequacy, posing further challenges.
What was the impact on your balance sheet due to these actions?
The impact on our capital was substantial. The Central Bank gave us a two-year window to absorb this, but as a prudential measure, we decided to take the full impact in 2024. Even after accounting for this, our total capital adequacy ratio stood at 16.5%, well above the required 13.5%, giving us a cushion of 3%.
In our 63-year history, the government, as the sole shareholder, has injected only Rs12 billion into the bank, which is relatively low compared to other state or private banks. Even mid-sized private banks typically have shareholder funds in the range of Rs22–23 billion, and these are banks with less than a trillion-rupee balance sheet. Ours is Rs3.3 trillion. Over the past 10 years, we’ve paid approximately Rs30 billion in dividends and levies to the Government of Sri Lanka, reflecting an attractive ROI to the shareholder.
As for this year, our first-quarter profits are expected soon, and according to the initial estimates, we’re on track to achieve the best first-quarter results in our 63-year history and further contribute to augmenting our capital going forward.
How are you dealing with multiple key stakeholders, from employees to the government as the owner, and the need to ensure liquidity despite strong profits?
We are the only major bank in the country where staff have significantly decreased since 2016. I chose 2016 as a reference point because it marked the beginning of the digital transformation in the banking sector. Compared to 2016, People’s Bank has reduced its workforce by approximately 700 employees. We are the only major bank to have seen such a decrease in staff numbers.
In 2016, our total assets were only Rs1.3 trillion, which increased to Rs3.3 trillion by the end of 2024. This highlights the efficiency and effectiveness of our staff. There has been a significant jump in productivity, which can largely be attributed to our digital transformation, new policies and procedures, system developments, and improvements in operational efficiency. Further, our liquidity levels are at their best. Our all-currency liquidity coverage ratio (LCR) is around 300%.
Another noteworthy fact is that while achieving all the above, we have never contemplated seeking taxpayer funds to boost our capital.
Given that the economy is clearly on a growth path, how do you plan to take advantage of the opportunities unfolding in the market?
This transformation and shift in our business model is, in many ways, a blessing in disguise. There’s significant potential with the country’s growth projections and what we see on the ground. This potential spans corporate banking, SMEs, and retail lending, including credit cards. It’s really about managing the allocation of funds effectively, and that’s what we’re focusing on right now. As a bank with 15.3 million customers, representing almost 70% of the population having an account with us, we have access to a wealth of real-time data.
The same approach applies to SMEs and micro-businesses. People’s Bank has always been very close to its customers. If you look at many of the top corporates in the country, most of their beginnings were with People’s Bank. They generally come to us because of our accessibility and People’s Bank’s reputation for listening to and supporting our customers. Even today, we have many schemes that may not be immediately profitable, but we remain committed to helping our customers in the long term. For example, we offer facilities for young entrepreneurs, covering investments and working capital, starting from 7%. For women entrepreneurs, we provide similar facilities beginning from 8% up to Rs100 million. For green financing and sustainable projects, we provide facilities at a concessionary rate of AWPLR minus 1%. As a responsible bank, we always focus on long-term and future growth, understanding that our customers’ success contributes to the success of the broader economy.
Considering everything, we are of the opinion that the SME and personal finance spaces present the most significant growth opportunities.
In the SME sector, we see strong potential because of the preferential treatment we offer and our deep understanding of these customers. We’re very close to them—thanks to our extensive branch network—and many SMEs and micro businesses come to us for financial requirements. We have already made great strides in this area, which has resulted in substantial growth in our SME portfolio. Our goal is to double the SME portfolio in the coming years. On the personal finance side, we receive a large volume of salary deposits, which gives us a clear advantage. It allows us to offer tailor-made facilities for housing, consumption, and even credit cards.
We also see an opportunity in the digital banking space. We currently have around 3.6 million customers using our digital banking services, the highest number among all banks in Sri Lanka, reflecting a clear shift from cash-based transactions to digital channels. We also have the largest debit card base in the country, with a market share of approximately 20%. We’ve also been quite active in the credit card space and continue to grow. So, when it comes to digital payments, People’s Bank is well-equipped and fully prepared.