Finding purpose and relevance for a legacy bank
Jul 19, 2021|

Finding purpose and relevance for a legacy bank

On the face of it, People’s Bank’s opening fewer new branches, lowering the footfall to its branches and maintaining a low staff headcount compared to the last forty years, seem like a deviation from its decades of work advancing access to credit for the most marginalised sections of society: rural poor and small businesses. As […]

On the face of it, People’s Bank’s opening fewer new branches, lowering the footfall to its branches and maintaining a low staff headcount compared to the last forty years, seem like a deviation from its decades of work advancing access to credit for the most marginalised sections of society: rural poor and small businesses. As the bank crosses into its 60th year in business, the dawning decade will be unlike any of the previous ones. A focus on younger customers and the future of finance in one way has simplified things for People’s Bank. Since young people are digitally minded their financial needs are straightforward; payments, credit cards and savings. Over the last five years, People’s Bank has embraced digital banking, with upgrades to the core banking system, critical systems that support other banking functions, smartphone apps and internet banking for individual and business customers, and self-banking units (SBUs) allowing customers to transact without entering a branch. More than ever, People’s Bank’s services are easily accessed.

Over a million customers use its personal banking app and more than a million others have been made customers through an online system that takes minutes to open an account, issue a debit card and set up internet banking. It’s a level of convenience that’s making banking accessible, relevant and convenient to modern consumers. On the face of it, what appears like a shift from its mission to serve rural communities and small businesses, isn’t at all a deviation, but a move to digital services. Almost everyone has a bank account now – compared to when the People’s Bank was founded. As a result, digital banking has become the primary means advancing financial inclusion.

The number of customers using just digital banking will overtake conventional banking over the next five years, estimates People’s Bank’s Chief Executive Ranjith Kodituwakku. “There’s room to monetise digital banking to recover some of the investments, but we’re not doing that. We need to be the catalyst for a digital rural economy, and this means people and businesses need encouragement to take up digital services,” Kodituwakku describes the role he foresees for the bank. Kodituwakku says by limiting customer footfall to branches for only the essential services, the bank’s service culture has improved. He joined People’s Bank in 1982 and went up the ranks to be appointed General Manager/Chief Executive, in 2020. Kodituwakku is one of the chief architects of the bank’s digital transformation, which started in 2015. He led teams to map business requirements, reengineering business processes and adopting best digital banking practices as the Deputy General Manager Commercial Banking and Digitalisation, at that time.

He distinguishes between “digital banking” – which People’s Bank offers – with smartphone apps and internet banking alongside old channels like branches, and a “digital bank”, which is banking available only online. Sri Lanka doesn’t have digital banks. However, its incumbent banks are in a tussle for digital banking leadership.

Since it’s a hybrid, digital banking must contend with legacy costs of a branch network and cost of tech like ditching mainframe computers for the cloud. In contrast, digital banks run operations cheaply, as they don’t have branches and legacy computer systems. Overseas where they exist, digital banks are only accessible through mobile apps or internet browsers. The public, for decades past, had a dim view of state institutions including the bank, for their poor service. Digital banking achieves several objectives for People’s Bank. They have freed up staff to pay more attention to customers. Second, apps and self-banking units (SBUs) have improved branch efficiency allowing customers to transact online and reducing the branch footfall. People’s Bank estimates around 80% of transactions that used to be done at a branch have shifted online and to SBUs. The most significant digital driven change is an ability to personalise services. Onboarding to a digital account now takes just 10 minutes, where a banking associate enters the data on a tab sitting alongside a new customer, setting up the account, internet banking, mobile app access and issuing a debit card. Although over a million customers have been onboarded with digital accounts, most people still haven’t experienced how People’s Bank has successfully married the old with the new. “Not enough people have experienced our services,” Kodituwakku admits. “It’s also a legacy perception challenge about our service culture or a poor past experience,” he says about the image challenge.

Younger customers will care less about a chequered record being keener on pricing, seamless technology, and useful product ahead of the brand loyalty their parents or grandparents valued. Besides, technology helps even legacy banks meet business KPIs, navigate complex regulations and improve process efficiencies leading to cost savings and higher profitability, Kodituwakku points out. “We had all these objectives in mind. However, our main goal is, improving financial inclusivity.” “We need to be the catalyst for a digital rural economy, and this means people and businesses need encouragement to take up our digital services.” Kodituwakku, has had a frontline seat to the transformation of Sri Lanka’s rural economy and People’s Bank with it. His first appointment was to the bank’s Kandy Branch in a junior position in 1982. Kodituwakku had since gained experience in branch banking, consumer banking, commercial and corporate banking, offshore banking, project finance and recoveries before being appointed the General Manager/Chief Executive in 2020. His long experience also assured a ringside seat.

For ease of understanding its trajectory, it’s useful to split People’s Bank’s 60 years into three eras; the first 30 years up to 1991 when the bank grew its branch network and loan book to become one of the largest in the country. Its second era, the twenty years to 2011, was a more challenging one. While growth continued, its poor credit decisions resulted in the non performing loan ratio climbing to over 20%. Its leadership teams from 2000 onwards restructured the bank returning it back to stability. Its third phase is the decade ending in mid 2021 when the bank’s technology adoption, productivity, and balance sheet growth lifted its performance, elevating the bank to a leader in the financial sector.

The first eight years since its founding, People’s Bank expanded its branch network at a record pace. By 1969 People’s Bank had 86 branches, the largest network of any bank. In the image is T. B. Ilangaratne who is widely credited as one of the founders of the bank at the opening of People’s Bank’s Avissawella branch in 1967 and Minister Philip Gunawardena, Vincent Subasinghe (first Chairman), and W H Solomons (first GM)

People’s Bank is state controlled: 92.3% owned by the government and 7.7% by cooperative societies. It falls on the bank’s Chairman, Sujeewa Rajapakse, to balance sometimes competing demands of stakeholders. “We need to maintain our independence, meet regulatory requirements and make sure we assist the government achieve development objectives,” says Rajapakse, who is also an accountant and the Managing Partner at accounting firm BDO Partners.

At end 2020, half of the bank’s loans were to the government and state-owned enterprises (SOEs). State exposure is mostly backed by government guarantees and other forms of assurances. Significant SOE customers include the Ceylon Electricity Board and the Ceylon Petroleum Corporation. “These institutions provide critical services to people, irrespective of whether those people are customers of People’s Bank or any other bank,” Rajapakse points out. He suggests in People’s Bank, Sri Lanka now has a model for state capitalism. “It’s a well-governed, financially independent bank able to compete with private sector and multinational banks on an equal footing,” Rajapakse said, brimming in a quiet confidence. For People’s Bank to support the development agenda, it must first independently fund its balance sheet growth. Only then can it lend to the economy’s priority sectors to support government policy and small businesses. Not all lending will be equal in the risk-return matrix. Its ability to evaluate and navigate risks, striking an appropriate balance, will be crucial, Rajapakse points out. The second objective receiving leadership bandwidth is aligning the bank to the county’s and its businesses economic agenda. Rajapakse says this is more challenging because over the next decade Sri Lanka will rise up the ranks of the middle-income country league table. Future development challenges of the state, the private sector and the people will be vastly different from the past. The board of directors are custodians of the bank’s stakeholder relationships. Of these, the most important one is with the shareholders. As the Chairman, it’s Rajapakse’s responsibility to navigate the relationship.

“The government expects state banks to finance SOEs. But that shouldn’t mean the bank is able to lend any amount or without adequate security. We obtain government guarantees for any loan to an SOE. That’s how we strike a balance.” On the flip side, over the past decade People’s Bank has paid over Rs187 billion to the government by way of direct and indirect taxes, dividends, and special levies. During 2020 alone, the value created to the government was Rs16.8 billion by the People’s Bank Group, of which over 85% of the value was generated by the bank. In 1995 the bank funded a subsidiary People’s Leasing and Finance (PLC) which is now a market leader in leasing and contributes significantly to the group’s profitability. In 2019 after tax profit at PLC was Rs4.3 billion and Rs2.7 billion in 2020. PLC is the most significant of the People’s Bank Group’s businesses.

People’s Bank itself no longer has a leasing portfolio as it owns 75% of the stock market listed PLC. Besides loans to the state, the bank supports a diverse number of businesses and individuals maximizing reach and impact. Outside of state related lending, no other single exposure exceeds 2% of the loan book.

The idea of People’s Bank itself was a risky undertaking. In the decades preceding its creation, farmers needing credit were dependent on cooperative societies which were established from 1911 and later the Cooperative Federal Bank established in 1947 as an apex for the movement. However, ordinary farmers already in debt didn’t have the money to become a member of a cooperative. It soon became evident that the cooperative system served mostly wellto-do farmers. Besides, cooperative societies were poorly capitalised and risky. Cooperatives were unable to absorb bad loans when droughts or floods destroyed crops. As a result, the government had to often bail out cooperatives. The Cooperative Federal Bank was established with government capital to address these shortcomings. However, the Cooperative Federal Bank too had several weaknesses, including not having branches and depending on other banks for lending – increasing the cost of credit. “As it is now organised, the Cooperative Federal Bank does not appear to be of much use to the cooperative movement, or to the public. I would, therefore, wish to see that this bank is reconstituted so as to be an effective institution,” the Central Bank Governor in 1956 Arthur Ranasinghe, wrote to the Minister of Cooperatives, Philip Gunawardena. In 1961 the assets of the Cooperative Federal Bank were folded into the newly established People’s Bank.

People’s Bank’s founding mission was to make credit accessible in rural areas

People’s Bank’s founding mission was to make credit accessible in rural areas. A business model to overcome the failures of the Cooperative Federal Bank was the priority for the founders of People’s Bank. In the first year, the bank established eight branches: Polonnaruwa, Hingurakgoda, Hambantota, Anuradhapura, Puttalam, Matale, Kandy and the Foreign Branch in Colombo, as rural branches became an early priority for its mission of inclusive credit. It had 169 staff. What followed was an era of blistering growth. From July 1961 to December 1969 a total of 106 bank branches were established island wide of which 83 were People’s Bank’s. Just eight years after founding, People’s Bank had the largest branch network of any commercial bank. By 1975 the bank had over a million account holders, equal to 10% of Sri Lanka’s then adult population. By 1991, or 15 years on, customers had quadrupled to 4.3 million. Assets and its branch growth continued during the 20 years from 1990 onwards. During the decade to 2001, the bank’s assets rose over 365% to Rs168 billion but its capital and reserves combined were negative despite the government injecting Rs10.5 billion capital in 1993. During this period, the number of customers more than doubled to 9.2 million and branches and service centers reached 553, up from 322 in 1990. Despite growth, during the 1990s a troubling loan quality deterioration took place, although it wasn’t reflected in the reported non-performing loan ratio. A new management team was appointed in 2000 to lead a turnaround. What followed was a precise strategy execution. Once the loans had been objectively reviewed the percentage that was nonperforming climbed to 20.9% in 2001. The bank was failing to meet minimum regulatory capital requirements even before the dud loan crisis

Normally depositors would be wary “ of a bank that was undercapitalised and where a fifth of loans were non-performing. However, its government ownership and the trust it earned during several decades of service to rural communities and small businesses,allowed the bank to continue growing deposits. Few customers knew or were concerned that People’s Bank was in trouble. During the 1990s deposits grew over 305% to 127 billion rupees. As a result asset growth continued uninterrupted. The turnaround was not a public event but it took almost a decade for the bank to return to some stability. People’s Bank’s non-performing loan ratio (see chart 3) in the decade ending 2011 had returned to 3.4% from 20.9%. Meeting regulatory risk-based minimum capital took longer, and the bank required a government guarantee (a letter of comfort) to continue in business in the meantime.

Pinpointing a start or conclusion of each phase of the bank’s evolution is challenging. People’s Bank’s second phase can be split in two, the period during which its loan quality deteriorated during the 1990s and its turnaround, much of which was achieved in the 2000s. However, it took until 2017 for the bank to successfully meet all Basel III Risk Control measures without any exception, including the Capital Adequacy Ratio, Liquidity Coverage Ratio, and Net Stable Funding and Leverage. The government had to recapitalize the bank on three occasions. The first was in 1993 with a Rs10.5 billion government bond with a 30-year maturity to improve the balance sheet and fund a shortfall in its Employees’ Pension Scheme. Despite this the bank continued to be poorly managed during the 1990s. By 2000 it was clear the bank had to be restructured again as its capital was inadequate due to low profitability and poor lending practices. People’s Bank’s corporate management team was changed in 2000 with the recruitment of heads of divisions from the private sector. The restructuring plan was supported by the government which aimed to streamline operations, improve profitability and the capital position to eventually meet the level set by the regulator.

In 2004, the Asian Development Bank (ADB)agreed to fund the recapitalisation by lending money to the government to fund the restructuring. Despite not meeting the Basel capital requirements, the bank obtained its first credit rating of BBB+ from Fitch Ratings Lanka. In the same year, 2004, it started implementing a new corebanking system. According to the recapitalisation agreement between People’s Bank, the government, and the ADB, the bank received Rs2 billion in equity capital in 2005, which was being lent to the government by the ADB. This was followed by infusions of Rs1 billion in 2006,

Rs1.5 billion in 2007, and the fourth and final tranche Rs1.5 billion in 2008. With its Tier-I capital restored, capital adequacy reached 10.5% in 2008. On the back of the stronger balance sheet, People’s Bank has issued debt, the first of which was in 2008, raising Rs2.5 billion followed by the second debenture in 2009, also raising Rs 2.5 billion. In 2013, a debenture raised Rs5 billion. The bank’s assets crossed the 1 trillion-rupee mark in 2014, a momentous achievement for the bank which just several years ago had a capital deficit. However, the rate of balance sheet and loan book growth meant that retained earnings were inadequate to build the equity it needed. On top of that, the bank had also been paying dividends. In 2017, the People’s Bank received a Rs5 billion capital infusion from the government, its third since founding, to keep growth on track. People’s Bank’s capital strength is now uncompromised, meeting the demanding risk-based criteria of the Basel III framework. It is the second-largest commercial bank in terms of assets, which passed the two trillion rupees in 2020.

The bank now sets an industry benchmark in ROE (return on equity). ROE exceeded 20% in three of the last five years ending in 2020

Due also to his background as an accountant and a former President of CA Sri Lanka, Sujeewa Rajapakse is sensitive to the importance of governance for long-term success of any business, particularly a bank. “The financial sector is the backbone in any economy, so it needs regulation. To complement regulation, we require good corporate governance,” Rajapakse explains. He says good governance achieves several objectives. The first is capital formation, another is the protection of customer deposits, and the third is its supporting financial inclusion. Today the bank has a leadership team and a board of directors who appreciate the legacy and the responsibility of the institution to be aligned withthe founding objectives and also be relevant for the future of Sri Lanka, he points out. Sri Lanka’s economy has transformed during the last 60 years, and along with it People’s Bank too has changed. In 1961 Sri Lanka’s per capita GDP was $142. Twenty years later, by 1981, per capita GDP had only doubled to $289. Since then the economic trajectory has accelerated. By 2020 the Central Bank estimates Sri Lanka’s per capita GDP was $3,680, which is some thirteen times greater than in 1981. The country is now at the cusp of entering the upper-middleincome league.

The government forecasts per capita GDP will reach $8,000 by the year 2030. As a government-owned bank, its leadership team has to figure out what role it will play in this projected economic trajectory and how it can be relevant to this economic vision. It’s had a good start on the basics. In 2019 People’s Bank issued its first Basel lll, tier-ll compliant debenture, raising Rs10 billion. Previously that year, the government had amended the People’s Bank Act improving the bank’s capital management flexibility. The most recent debt issue, a Rs20 billion debenture in 2020 is one of the largest single issues in Sri Lanka, and the largest by a financial institution. It’s not just with capital raising that People’s Bank is a leader. The bank now sets an industry benchmark in ROE (return on equity). ROE exceeded 20% in three of the last five years ending in 2020. In the last financial year (2020) ROE was 14.4%, still one of the best in the banking industry, and well above risk-free government debt returns. The contrast could not be starker from the past when the government had to provide additional capital on several occasions.

A savings account, for most people, is their central relationship with a bank. For several decades now, any adult can open a savings account simply by proving their identity at any of the thousands of bank branches islandwide. Sri Lanka now has more savings accounts than it has people, because many people have several accounts.

Banks cross sell loans, credit cards and mortgages to account holders profiting from the interest rate spread. At the same time low cost savings also fund business loans, and banks also profit handsomely from fees and commission that they charge customers for services. This customer relationship around the savings account is about to be disrupted by digital platforms. Platforms like Alibaba’s super apps, ecommerce businesses like Amazon, and ride hailing services like Grab and Gojek are all moving in to payments, insurance and loans. Incumbent banks fret that their customers will decamp to Sri Lankan platforms already offering a pick-and-mix of services including shopping, payments and entertainment, when these platforms start offering financial services. Sri Lanka’s population is young and the market for low cost financial services is growing fast but its incumbents are ill prepared to capture the high volume and low margin business they generate. Platforms will not displace banks entirely. They might even help banks serve customers they would otherwise not be able to reach.

However, platforms will create value from technology, and most likely, leave banks to deploy capital to support loans. Relying on platforms to reach customers interrupts the upselling following the establishing of a banking relationship with a savings account. Instead, platforms will build customer loyalty to themselves, marketing a mishmash of services informed by the data they are expert at gathering. People will also prefer to save, invest and obtain credit though one smartphone app, perhaps the same one on which they shop, have food delivered and play games on. What will remain for banks is the regulated part of finance of deposit taking and capital deployment for loans originated by tech platforms. Financial institutions are quaking. The threatened disruption by platforms is one nightmare. The other is that digital only banks will soon be licensed, as they have been in many places in Asia and Europe. Behind the giddy growth in the platform economy and the conditions for the emergence of digital banks are both a case and a consequence of big changes in Sri Lanka’s social economic climate: urbanisation, development and the emergence of a vast middle class. These changes mixed with the disruption caused by technology itself is making incumbents in every industry nervous. To survive the coming restructuring banks will have to reinvent themselves. “I tell my teams all the time,” says Rajapakse,“don’t look at customers as a typical banker would, you must approach them instead as a business partner.” He has been encouraging bank teams at all levels to customise solutions for clients.

“We cannot take customer trust and loyalty for granted. Neither should we expect that customers will be simply satisfied with access to a bank branch within easy reach. As Sri Lanka advances and income rises, people and companies will expect platform type convenience, keen pricing and outstanding service from their bank too.”

Since 2015 People’s Bank has invested more than Rs3 billion on technology to build a single integrated digital banking system connecting all its disparate functions, processes, and customer interfaces like web, mobile apps and its self banking units (SBUs). Its accelerated digital roll out aims to first conquer the smartphone. In a country where there are more mobile phone connections than there are people, a majority now use smartphones.

Of People’s Bank’s 14 million customers around 40% are minors who cannot use digital applications. People’s Bank’s Chief Executive Ranjith Kodituwakku expects half of them will use mobile banking in the next few years. “It’s a realistic goal”, he says, “because these applications will save time and are convenient”.

Over the years, technology has impacted productivity too. Kodituwakku illustrates impact with his own experience. When he joined the bank in 1982, Kodituwakku says, it counted around 9,800 employees and had 290 branches and service centers, or around 33 employees for every branch. Today the bank has 741 branches and services centers and a staff of around 7,700, or just over 10 employees for every branch in operation. That jump in people productivity was achieved entirely through technology. People’s Bank’s Chief Executive says teams have stepped up during the last decade to deliver high quality service. Besides new technology, a decentralized structure has pushed decision making to the regions, freeing frontline staff for customer service and allowed for faster approvals, for customers.

Banks have traditionally created value by deploying capital efficiently. In the future the greater value in financial intermediation will be created by technology and not by deploying capital to support loans. Incumbents must now compete with neobanks and fintechs by offering a variety of services in addition to banking. People’s Bank is well on the way to a third phase of its growth, one that it hopes to lead the Sri Lankan financial sector in, of digitally transforming finance. For People’s Bank to be mission relevant, it will have to find new ways to be inclusive and support the government’s development agenda. Supporting a broad purpose is a complex undertaking. Success with the government’s development agenda and economic growth will lift people out of poverty and empower them. It will empower people, which is also the bank’s ultimate goal. To achieve this, the bank has to maintain its independence, meet regulatory requirements, and ensure other stakeholders’ needs too are served. Crucially it will have to navigate the coming restructuring in the financial sector. The bank’s Chairman Rajapakse confesses to a sense of pride at how well the bank has set itself up in its 60th anniversary. Besides being digitally led, it is a financially independent, modern bank with best in class tech and an overarching culture of service. He says the team is confident about the future because the bank has readied every facet of its business.

The bank’s Chairman Rajapakse confesses to a sense of pride at how well the bank has set itself up in its 60th anniversary. Besides being digitally led, it is a financially independent, modern bank with best in class tech and an overarching culture of service

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