• Consortium loan to bail out Vanik
• Direct to Consumer: The Outreach way
• Mind your business
• More than half had deviated
• Trade deficit to contract
• Hotel sector to slump
• The year ahead: fiscal discipline vital for growth
• To make the biggest bank, the best bank
• News

Consortium loan to bail out Vanik

By Chanakya Dissanayake.

The consortium has met twice so far, however, without the participation of Vanik. As the first step, the banks have ordered a quick independent audit of the Vanik's assets to obtain an impartial picture of the situation. The audit is expected to be carried out by PriceWaterhouseCoopers within 3-4 weeks. The banks are expected to take the necessary steps after the report of the auditors.

A senior Government official told The Sunday Times Business (STB) that "It is obvious that Vanik has taken too much risks, according to the norms of the financial sector. But we do not want any financial institution or any financial instrument to fail. If a debenture or any other instrument fails, it will be detrimental for the whole financial sector". He also hinted on capital inflows to bail out the Vanik.

Meanwhile, the Vanik's delay in paying the interest to its debenture holders saw its debenture being transferred to the newly established default board of the CSE. The interest payment was due on last month.

Vanik CEO, Justin Meegoda commenting on the CSE's move told the Business desk, "We are surprised by this move of the CSE. The need of the hour is to revive the market, not to create default boards. We had informed the CSE about the impending delay in the interest payment with reasons". He added that, "Currently there is a difficulty in getting the companies to list. But this kind of negative moves will further deter new companies from obtaining a listing".

Meanwhile, a debenture holder obtained an enjoining order last month, preventing Vanik from selling any of its assets. This was obtained on the basis that the guarantee on the debenture will be invalid if Vanik disposes its assets over the 50% mark. However, Vanik claims that they have re-negotiated with the guarantors, People's Bank and USAID to dispose this particular clause.

"They have agreed to dispose with this clause. We will be requesting the court to remove the enjoining order, because the basis is not valid now," said Mr. Meegoda.

Vanik further claims that this enjoining order has significantly contributed towards the delay in the interest payment. "It has prevented us from selling assets in the normal cause of business. We cannot even sell a vehicle we recover in our leasing activities. The planned sale of capital assets were also stalled," Mr. Meegoda said.

The delay in receiving the expected remittance from Amalgamated Bean Coffee (Pvt) Ltd., of India has also contributed towards the delay in the debenture interest payment, he said.

According to Vanik, the Reserve Bank of India has only permitted remits out of exports proceeds to this company. The delay in the year-end harvest has prevented the Indian Company from remitting the dues on time.

Mr. Meegoda said that the Indian company has informed Vanik that it would be remitting the funds on or before January 15 2001. 

"Once we receive the funds, we will be making the debenture interest payment with interest for the delay," Mr, Meegoda said.

He said that confidence has improved due to the positive steps taken by its creditors. "We are doing everything possible to turn Vanik around. A detailed business plan which concentrates on the leasing while the factoring business is awaiting board approval."

Direct to Consumer: The Outreach way

In Sri Lanka, generally advertising agencies sub-contract this type of advertising and promotion to a third party. The third party happens to be a mere supplier and does not know or fully understand the brand and its values. Ogilvy Outreach (Pvt) Ltd. is an agency that specializes in this direct-to-consumer form of advertising and promotion. As custodians of the brand they conceptualize and carry out communication campaigns relating to brand values themselves. This is complemented and supplemented with traditional above the line advertising. 

One such campaign, a southern drive for one of its clients went into desk research and then, physical visits with a lot of chat with people in the area taking note of their problems. 

These were then analyzed and prioritized against certain criteria like the number of people in the area, location like road fronts, etc. 

The result, washing stones, near the wells and other popular washing areas branded of course with Robin Lemon painted on another stone. The impact was complemented with a branded truck that goes around with performers to these locations and other town areas performing skits talking about the benefits of the product. 

Another campaign for Singer Tractors, identified that its targeted farming area of Dehiattakandiya was going through a drought. The campaign solution "Singer Shanthi Karmaya", an authentic time mapped traditional ritual asking the gods for rain. 

"We find that a cultural orientation gives a better brand image among the rural communities" says Ms. Sandya Salgado, CEO of Ogilvy Outreach. The concepts developed are unique to client, so that it helps them to retain the concept and build brand equity on it should they wish to go further.

Although cost per contact is high on this form of advertising, it is comparatively low when it comes to the normal advertising media budget; and the results are both qualitative and quantitative from campaign to campaign. 

Though passed down from its Ogilvy counterpart in India, Sri Lanka's success story has become an Ogilvy & Mather model for application in South American countries. Ogilvy Outreach is a subsidiary of Phoenix Advertising whose clientele include CIC whose "Pata Pata" campaign earned them a SLIM Gold Award.

Mind your business

MPs fuming; petrol up?

They have earnestly lobbied the powers that be to come up with a compromise and as a result those distributing petroleum products have been asked to provide options that be popular.

There aren't many however and the most likely alternative is freezing the price of diesel and off-setting the losses with an increase in petrol prices, analysts say.

A chance on casinos

Now, along hard look is being taken at the industry with a view to 'regularising' some of the activities that take place between the Roulette wheels.

So, casino owners may still be allowed to operate but there may be more taxes to pay and more laws to adhere to.

Interesting eh

But the bubble is likely to burst sooner rather than later, with rates expected to decline before mid-year, bankers say.

But right now, funds are flooding in especially to the more reputed institutions which have also hiked their rates to be competitive and the big bank is even contemplating intervening to try and maintain the status quo..... 

More than half had deviated

Year 2000 was the first year the board has been in active operation. Upto 31 December, it has received financial statements from 341 specific businesses and many of them have had multiple deviations from the standards. 

According to the board, the total number of deviations detected has been 265. The majority has deviated from the standards relating to disclosure and presentation. 26 deviations have been in relation to the standards governing recognition and measurement.

Deviations from the standards detected include, failure to recognise decline in value of current investments, non recognition of other than temporary decline in value of long term investments, not providing for deferred tax, errors in the amounts shown in the cash flow statements, incorrect accounting of goodwill and negative goodwill on business accession, assets not depreciated, use of inappropriate accounting policies and inadequate disclosure of information.

Where significant deviations which substantially alter the financial position and financial performance of the enterprises were detected, the Board took appropriate steps to ensure that corrective action were taken by the enterprises.

Departure from Sri Lanka Accounting Standards detected, which were material, but not so significant as to require the use of procedure using statutory provisions, were informed to the enterprises, by letter, without extensive inquires, so that the enterprises could, where necessary, take corrective action on their own. Such letters are not directions issued by the Board, but are untended to be letters of assistance. The Board approached the review of financial statements in such a manner as to achieve maximum effectiveness with a minimum of inconvenience to the enterprises.

The first complete financial year to which the provisions of the Act would apply is the year ended 31st December 1999. In respect of enterprises preparing financial statements up to 31st March, it would be year ended 31st March 2000. Therefore, the monitoring activities of the Board commenced during the later part of the year 2000.

The function of the board is to monitor compliance with Sri Lanka Accounting Standards and Sri Lanka Auditing Standards, in the preparation, presentation and audit of financial statements of specified business enterprises. Specified business enterprises include commercial public corporations, quoted companies, and other economically, significant companies.

Trade deficit to contract

The three sectors grew by 78 percent, 109 percent and 46 percent respectively in the first ten months of 2000. Agriculture is also tipped to record a drop in growth in 2000 despite a record year for tea exports. As a whole, Asia Capital Stock Brokers expect a 18 percent growth in exports and forecast export growth in 2001 to be around 9 percent to 10 percent on account of the slowing US economy, Sri Lanka's key export market and rising competitiveness s of rival Southeast Asian manufactures. 

Meanwhile, imports declined 4.7 percent YoY to US$ 565.5 million, as the previous year's imports were boosted by the purchase of an Airbus aircraft by the national carrier. 

Asia Capital Stockbrokers reported that if the cost of the Airbus was taken out, imports would have grown by 14.4 percent, driven mainly by an increase in investment goods. Though encouraging, they fear that the increase in investment goods might actually be weapons imports, which are also classified as investment goods. 

Also worrying is the moderation of intermediate goods to 5.7 percent. Brokers say that inputs for the apparel manufacturing industry accounts for around 45 percent of intermediate goods imports, but the increase was likely to be due to increased crude oil prices during the year. 

Consumer goods on the other hand is expected to record a handsome growth over 1999 despite lower imports of rice and wheat grain. They attribute the growth in the sector to increased imports of sugar and dairy products. 

Asia Capital Stockbrokers have revised down their import growth estimates for 2000 from 26 percent to 22 percent. For 2001 they maintain a growth projection of 7 percent. 

Consequent to both revisions, the brokers expect the trade deficit to expand less sharply by 36.2 percent YoY to US$ 1,769 million. Meanwhile, for 2001, they expect the trade deficit to contract by 5.3 percent YoY to US$ 1,675 million as they expect export growth to outpace import growth. 

Hotel sector to slump

Brokers say that as a result profitability of the hotels would suffer for the financial year 2000. 

Asia Capital Stockbrokers said in their monthly report that room supply had increased by a whopping 9.8 per cent or 197 hotels in operation by September 2000 compared to 164 hotels in operation in September 1999. 

Meanwhile, average occupancies have fallen 6.9 per cent YoY to 49.2 per cent of total capacity in the same period. 

Coastal resorts were the most hard hit as occupancies declined 6.7 per cent YoY to 47.3 per cent. The Central region which saw room supply go up by 15.4 per cent, saw occupancies come down by 11.4 per cent to 48.8 per cent. 

City hotels have followed suit, and also saw marginal drops during elections. However, brokers say that the winter season might bring the tourists flocking to Sri Lanka only if the present climate continues. 

Brokers went on to say that the turnout of events would affect the hotel chains the most. 

Adding fuel to the fire, the devaluation of the rupee in June, November and December, though having provided some respite, have contributed to higher inflation, which would result in rising cost at the hotel, which would in turn limit margins. 

In addition to the stack of problems already faced by the sector and the on going North-East war, brokers forecast a drop in arrivals in 2000 over 1999. 

The year ahead: fiscal discipline vital for growth

There is every likelihood that global economic conditions may continue to be favourable to Sri Lanka.The global economy is expected to grow reasonably well. Last year's export growth could continue, as there is no reason to think that the prosperity of Western countries would wane. The single anxiety that hung over these economies was the up trend in crude oil prices. Crude oil prices have come down from the high levels reached last year and are likely to stabilize at a level which would not act as a brake on the continued prosperity of the US economy, in particular. 

The favourable global economy including the revival of Asian economies will give a further boost to our manufactured exports, which grew by around 20 per cent last year. This would be an important determinant of the country's economic performance this year. Tea prices are also expected to hold at around Current levels of about US$ 1.50 per kilogram.

Last year's economic performance was marred by the massive increase in war expenditure. The increase in war expenditure by an additional 1 percent or more of GDP was a severe burden on both the already strained public finances of the country and the balance of payments. 

The sharp rise in interest rates and the erosion of the official foreign exchange reserves to reach a critical level were the result. These factors are an overhang on the economy this year. A dramatic reversal of these conditions coupled with a strong economic performance would be necessary to off-set the adverse impacts that have occurred. If, on the other hand, war expenditures continue to rise, there is every likelihood of macro economic management destabilizing the economy. The curtailment of war expenditures, particularly imports of military hardware is vital to ensure a recovery in the fundamentals of the economy.

Last year the country was struck by both the needs to increase crude oil imports as well as face a situation of rising prices. In as far as it could be foretold, these adverse developments are not likely to prevail. Crude oil prices have fallen from the high US$ 34 level and may even slide further. The prevailing climate in the country lends hope for adequate water levels in the reservoirs and therefore much lower crude oil imports may be needed for thermal generation of electricity.

Both the macro economic conditions that have emerged and the policy initiative to face these would be important determinants of the country's economic performance this year. Particularly significant would be the capacity of the government to bring down interest rates. This is a formidable challenge in the midst of heavy government borrowing. Whether the government would adopt measures to both reduce expenditures and increase revenues would have to be seen when the Budget for 2001 is presented early this year. The curtailment of expenditure is at the heart of the solution to the problem. Not only must defence expenditures be curtailed, but welfare and administrative expenditures would require severe cuts.

The behaviour of the government in the first months after elections does not lend much hope to expecting cut backs in wasteful expenditures. The lack of fiscal discipline and mismanagement of the economy also implies a reluctance on the part of multilateral agencies to come to the assistance of the country. A serious approach to economic affairs in the face of the difficulties facing the country is imperative. This indeed is the crux of the problem.

Fiscal discipline will be at the core of the solution to the management of the economy. In the face of the extraordinary expenditures last year and the continued high war expenditure, it would be imperative for the government to cut expenditures in other areas. 

In a situation that requires international assistance to resolve the balance of payments difficulties, good governance would no doubt be a pre-requisite to obtaining such assistance. 

To make the biggest bank, the best bank

STB: As a General Manager and who had worked more than 35 Years at the Bank of Ceylon, what is your vision for the bank?

Sarath de Silva:My vision for the bank is a shared vision with the Chairman. It is to be the best bank in Sri Lanka and also perceived by the stake-holders to be the best. 

At this moment, what is your overall marketing strategy for the Bank? 

We will be improving the customer and market focus for our products. We will be having focused delivery channels for corporate and retail markets. Bank of Ceylon has already launched 365 day banking at many of its branches. This is in line with our new concept of being, "open all hours- all the days". We are crossing the traditional boundaries to meet the customer expectations.

Also we have started a NRFC branch at the Katunayake airport and this is one of many new services that are on the pipeline. BoC will act rapidly and cost effectively to meet the customer expectations as they arise in the future. Customers would expect nothing less from us. Our structural reforms will enable us to reach these objectives quickly.

As a senior banker how do you see the role of State banks in the contemporary economic environment of Sri Lanka?

The commercial banking arena in Sri Lanka has grown already. We have seen the private commercial banks including the foreign banks venturing out of Colombo towards suburbs. Basically they are catering to the higher and the middle levels of the market. The DFCC and the NDB is also following this path. The DFIs have crossed their traditional boundaries into commercial banking.

In this context, the role of the BoC would be to play a catalytic role in developing the grassroots sectors while providing an adequate return to its stake holders. Currently the DFIs are catering to the upper end of the market where risks are lower. BOC has the reachability and the risk taking capability to cater to the medium, small and the micro sectors, which are not comprehensively served by banks of pure commercial orientation. In short BoC will take greater risks and operate in areas that are not serviced by other banks. We will go to those sectors with a sense of sincerity to fulfil our national obligation.

Just like any other institution in the service industry, the quality of the work force plays a major role in the success of a State bank. Bearing in mind the constraints in matching the remuneration levels of the private sector, what is your strategy to attract, retain and motivate top quality professionals?

Human Resource Management (HRM) has received our highest priority. The re-structuring program has also given highest priority to HRM. BoC will be deploying a strategy of outsourcing while in core areas employing expertise at market rates. At the moment we have several specialists employed at high remuneration levels and we are head-hunting for a marketing consultant.

To what extent has politicisation affected State banks?

Politicisation is a relative term. There is nothing wrong with Politicisation if it is good. A certain level of autonomy has being extended to State banks through the MA signed between the banks and the government two years back. Government has undertaken not to interfere with the day to day operations. This has given BoC sufficient autonomy to operate with a commercial focus.

We see many consolidations in the private banking sector, can we expect the same trend in the State sector?

This is a major policy decision. In the case of State banks, while the opportunities can be explored in the medium term, the immediate opportunity exists for strategic alliances in form of network sharing. For example People's Bank and the NSB could share a common ATM network. BoC is also working on a number of strategic allegiances. We are also negotiating with the Ministry of Post to use Post Offices as delivery channels.

What is your view about Universal Banking in the Sri Lankan context? 

The applicability of universal banking will depend on two factors. Firstly the diversification rules governing the banking sector. Secondly, the ability of the individual banks to expand the scope in various financial segments.

The problems in introducing universal banking will include the negative experience in Sri Lanka, the idea is still at an infant stage. Also the complexities involved in the macro governance of diversified universal banks would also create problems. The structural weaknesses in the financial sector that include, high rate of NPA's, high reserve requirements and weak legal structure would also negatively influence Universal banks.

On this context, universal banking will take place, but it will take time in Sri Lanka. The legal framework should be conducive to universal banking.

Currently there is a record defecit of Rs 32 bn in the call money market. Can the BoC assist the government to bridge this defecit and ease the interest rates?

As the largest player, BoC is helping the government, within its capability to bridge the deficit and ease the interest rates. Our rates for both advances and deposits are vary competitive. We cannot ease the interest rates in isolation, we need the assistance of other banks and the Central Bank. BoC is mindful of its role in this situation and we are already doing our part.

The Insurance allegiance BoC entered with AG, can we see it as a diversification?

It is a strategic allegiance to increase the products we offer.

The Banking Act does not permit banks to get directly involved in Insurance. The legal framework is about to be amended and the matter is under the consideration of the Central Bank. Therefore we will be only acting as a delivery channel for insurance at the moment. We will also train our staff for marketing of insurance policies. BoC has already signed a letter of intent with the AG.

What is your opinion about the government directed lending of the State banks?

The donor agencies are very allergic to this term. What is bad is the misdirected lending, not directed lending. If it is directed for a good purpose it is good. These are demand driven necessities, even though high risk. The BoC is taking a budgeted approach to this.

But on the other hand we need to make the non viable sectors bankable someday!. The schemes are there to enable the people who do not confirm with the normal criteria to obtain credit. The so-called non viable sector is a potential banking market. BoC is taking a cautious approach towards this sector. Non credit input should be deployed for this sector, developing its ability to absorb credit later. What is bad is not the directed lending, but the lack of non credit input including training for the non viable sector.

What is your strategy to control the non-performing loans at the Bank?

The current non-performing loans are a result of the operations of the past 60 years. We are also very comfortable with the built up bad loan provision position at the BoC. Our provisioning is very stringent that exceeds the Central Bank standards. At the same time a recovery exercise is managed by a recovery task force appointed by the board. Each branch has a recovery co-ordinator and we are having a targeted approach towards non-performing advances. The response is encouraging.

What is your view about privatisation of the State banks?

The government has no such plans at the moment. There is no immediate need for such. As you are aware, the bank has already launched a strategic restriction, which will continue for the next 2-3 years. 

This is need based and demand driven. We have appointed a separate DGM division for this re-structuring exercise. The bank would adopt a profit centre approach with a customer focus and a market focus. We want the BoC to be perceived as efficient and profitable by its stake-holders. We want to offer value added service and the range of products to it's customers while maintaining its duel character as a commercial bank and a development bank committed to its social obligation.

If we run the bank on a commercial footing the ownership will be immaterial.

It is a known fact that the State banks are holding excess staff. What is the inevitability of a volunteer retirement scheme for BoC?

A V.S.R scheme will not be introduced immediately because the staff retirement in BoC is already high. We may even have to employ more staff in some areas such as the counter service.

There is a peculiar situation in the staffing at BoC. We have an abnormal staff age structure. Our staffs are mature, that is a fact. The BoC slogan is, "those who build the bank to this position will be entrusted with rebuilding it".

Experience plays a major role in the banking industry. We need experienced staff to take over from the ones who are retiring. Therefore having a little excess staff helps the continuity. You cannot make a good banker overnight!

There is another aspect. Over-staffing is a relative term. The paradox in State banks is that, lower level staffs are paid higher than market rates and the higher managerial staffs are paid less than market rates. This is partly caused by the collective agreements. However, to rectify this we are introducing a performance based remuneration system.

What is your view about Chapter 11 style reforms for Sri Lanka.

It should receive serious consideration from monetary authorities. At BoC our approach is not to resort to foreclosure in regard of non-performing advances immediately. We are concentrating on reviving the sick businesses.

BoC's branch network is still not linked. What are your plans for IT infrastructure development?

At present BoC has 14 branches which are interconnected. There are 37 ATMs. We are implementing a good communication system with the assistance of SLT within the next few months. 40 more ATMs are currently being purchased and arriving in batches. 50 branches islandwide will be given ATMs. My vision is to be the No 1 in IT before 2002. We have the resources to do it.

Any Rationalisation of branches? 

This is one of the strategies that could be adopted under the re-structuring plan. Where possible we will merge branches depending on operational profitability and the need, keeping in mind the demand for its services within the next 4 to 5 years. However in the short term, there will not be any reduction in the number of branches. The number of provincial offices could be reduced. Each branch has an account carrying capacity. You can't just transfer the accounts of one branch to another. By doing so you might make that branch non-viable. Branch network is also vital for deposit mobilisation.

Theoretically, in 10 years' time branch network is going to be a liability. It is now happening in UK. According to the new theory, there is a case for "community banking". This is to revive the declining banker-customer relationship. In lines of "the case for community banking", we can adopt a new banking model for Sri Lanka. It has to be a cost effective delivery channel, which is a marriage between the formal and the informal. 

What is the strategy behind the employment of a CFO?

The CFO is a modern concept, We are proud to say that Bank of Ceylon is the first bank to employ a CFO. The CFO will look into the risk aspect. He will be evaluating the risk of the operations and reporting to the board and the corporate management. He will set a direction and give signals. We welcome the idea. CFO could be the insurance against failures. Mr. Anthony Barnet, who is a senior consultant with a proven track record, will be taking over as the CFO.

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