Financial Times

No economic freedom without law and order - Rienzie

What is the long-term strategy of HNB with regard to Sri Lanka? Also, will it consider moving into other markets. If so, are there significant opportunities?

HNB has been a very strong organisation for the past 30 years and we are preparing ourselves to be an umbrella organisation to the financial sector. We are sorting out the regulatory restrictions and operational issues the bank has. We want to play a more dominant role in banking not only in Sri Lanka, but in the region as well. There are trade agreements now with India, Pakistan, and Bangladesh and it is important to realise the market in financial services. HNB is ready to take up that role not only in the region, but also in the Middle East as well, since we have a lot of Sri Lankans working there.

However, our planning is long term and there should be stability in the country for at least five to six years before we allocate our resources. We are aware of the strengths in India where a large trading population amounting to one billion reside. The Middle East, particularly the UAE, is no longer dependent on oil and is looking at trade. I see many opportunities for trade there.

What do you think is the key competitive advantage that HNB has when compared to other large banks operating in Sri Lanka?
We came out with many initiatives 20 years before our competitors. HNB was the first bank to start a separate marketing unit.

We realised this in the late 1970s and 1980s and started extending our branch network because customer relationships were very important, retail customers should be an important focus and the economy of the country is dependent upon 70 percent of the rural population. We opened our branch network in rural areas more than 10 years ago.

We have a distinct advantage because we have a longer-term relationship with these customers and they have grown with us. At present we have good margins from these segments.

We are able to promote high end products like credit cards to them, because our relationship is very close. We have a variety of products and services serving every section of the economy, whereas many competitors mainly concentrate on the corporate and Colombo centred business.

In recent years HNB appears to be diversifying into various financial sectors. Will there be further diversification? Does HNB aim to become a financial conglomerate?

Diversification is a must and we have started early. HNB realised that traditional banking is insufficient and set up an insurance company. We started a stockbrokering arm in 1993. We have strong subsidiaries for leasing and pawning. HNB has taken pawning, which was confined to the poor people, to the upper market. Now businessmen who cannot show their wealth use this service to obtain up to one million rupees to buy stocks for one to two weeks.

Who is your main competitor among the local banks and how do you see your performance against your competitors?

Commercial Bank is the strongest competitor. They have got ahead of us in profitability and operational efficiency. Due to the unconducive macro environment in the country we have strained our capital with the head office venture. We became saddled with three large non-performing loans (NPLs) and there was a high turnover in IT heads. These caused operational problems, cost and overhead issues. The property market crashing and repayment from customers being overdue, also affected our competitive edge. I believe the bank has enough resources, which can be put into more optimum use to be in line with the competitors.

What about competition from the state banks?
A few years ago we had a free flow of business from the state banks and obtained a sizeable market share of their business particularly from the outstations. Now the state banks are restructuring to face competition and increase their market share. NSB has become very conscious of the competition.

The state banks still enjoy 60 percent market share in the retail market. Out of the balance 40 percent HNB has 14 percent of the market. The budget has made a proposal to give a special rate for people depositing at NSB and the Bank of Ceylon, disrupting that level playing field which is not fair. The government should strive to maintain a level playing field for all banks.

Foreign banks mainly HSBC are growing their operations in Sri Lanka particulary among the urban segments. Would this be a threat to HNB and what strategies are you taking to overcome them?

Foreign banks have sophisticated technology, a brand name, they have an advantage on the foreign currency rates and are able to use the strengths of their head offices particularly for trade and finance. They mainly cater to the urban sector, the professionals and the educated class. There is a certain category of customers which the foreign banks are not able to tap. We are a local bank and a household name catering to this sector.

HNB appears to be focussing heavily on rural development in the form of the Gami Pubuduwa scheme. Does this add significantly to your bottom line?

Not on a one-off basis. Twenty years ago we felt Corporate Social Responsibility (CSR) was a part of someone's choice of a corporate. We went to the rural economy because we realised that without promoting the rural economy the country's future is not stable. In return we as conglomerates cannot be stable.

We also had to put some resources in the form of relationships that we built. It is not one-off profitability but long-term sustainability. In the coming year we are going to do a lot of projects which are going to be sustainable.

Many of the products are given localised names. What is the purpose of this?

It is global trend that people get attracted to the brand name. Today the strongest thing we have is the HNB brand name. It is part of our plans to get closer to the community.

The bank is presently involved in many social responsibility activities. Do you think that you have done your maximum in this area? What more do you think the bank can do?

There is plenty more to be done. What we have done is very negligible considering the requirements. There are 93,000 village units in the country each having at least 75 families. Next month we are going with a massive project to look after the rural sector as a highly focussed, long term, sustainable project involving staff and customers who want to participate voluntarily. These are going to be close to our branch network.

Has the new head office complex helped the bank to rationalise cost?

The building was started when the country was on a fairly sound footing economically and we spent Rs. 5.5 billion on it. We wanted to have a building to house our head office and even though the country was not doing well economically, we wanted to show confidence in the future of the country by building this office.

We got the benefit of better space, better image, better hold on the market and better hold on the correspondent banking relationships. Our group companies are also located at this building.

We are spending Rs. 23 million a year to maintain this and there is a strain on the capital. We have overcome the difficulties in renting out space but there still is a strain on the capital. However the benefits of the building will be reaped in the long term.

During 2003 Fitch down graded your rating from SL A to SL A-. Have you taken action to improve the situation since then?

Yes. This was due to the strain on capital and the non-performing asset (NPA) cover. Our provisioning at the time was only 20 percent of our total NPA. The technology at the bank has also been coordinated well. We are expecting a higher rating next year since our capital problems are virtually solved.

Two shareholder groups collectively own about 60 percent of the bank. Does this affect your independence of decision making?

Certainly not, infact it is a strength. I find the two dominant shareholders are a strength to the bank as they on their own have shown success in business. I have been the CEO for the past 17 years, and independence in decision-making has not been a problem. The bank would not have progressed, and we would not have seen deposit growth if there were issues.

However, there are disadvantages with regard to these shareholders. I am unable to lend to them anymore because they are shareholders now, but they were very good customers then.

Non-performing advances have improved in your balance sheet in 2003 when compared to 2002. What is the main contributor for this and do you think it is improving in 2004?

It will improve further. In 2002, eight customers caused 90 percent of our provisioning. However, our retail lending and portfolio is very strong in the branches and we are maintaining a seven to eight percent recovery rate. Rural finance is doing a 93 percent recovery rate. We have seen an improvement this year and we will see a better improvement next year.

Kabool Lanka and Browns Group are two organisations to which the bank has had significant lending as well as non-performing assets. How is this position at the moment?

We are trying our best to find investors for Kabool Lanka. The asset is still valuable. The government's response is there since it has become a national issue due to unemployment and hope that some support will come from the government to restructure this, but we have taken a worst case scenario and planned to take the provisioning in full by end of next year including the value of the asset. Meanwhile, Browns Group has improved and we securitised the exposure and they have done well during this quarter. We have recovered all the overdues and the interest from the group.

Earnings for the first nine months of 2004 have improved compared to 2003, but other income has declined Why has this happened?

That is because income from the primary dealers, bond market and the stock market was completely reversed this year.

Do you think the bank will be able to perform better than last year by end of 2004?
We hope to come up with a fairly satisfactory performance but I don't believe that we can do better than last year. Our provisioning problem is going to persist because of the Kabool situation, but we hope to pass the billion mark.

You have been leading the bank from 1988. What is the most challenging situation which you have faced?
The biggest has been to adapt myself to country situations and making sure the bank maintains its core values, which are its customer relationships, services and its CSR initiatives.

Providing leadership and building successful teams would have been an ingredient of your success. Could you share your approach with us?

I have a strong team at the management level. I have strived to place the right people at the right places. All of my team has done very well in their respective fields and have commanded attention by working hard.

It is often claimed that ultimate success of a leader is in effective succession planning. Has such a system of planning been put in place at HNB?

My succession is planned. And I assure that whatever changes take place at the top, there will not be any dilution of the standards that we have maintained.

As an experienced business leader do you see potential for the Sri Lankan economy and how do you think that Sri Lanka can make it to the rest of the league of developed nations?

Our biggest issue is peace. The two leaders are committed to peace, but are not committed to working together, but they must set an example. We should concentrate on our economic freedom as well as our social freedom. We are paying a high price on democracy in this country. Crime has got completely out of control. The law enforcement officers have vested interests. There cannot be economic freedom in a country if there is discrimination and no law and order.

Is HNB able to easily obtain the right quality workforce? How is your labour turnover?

Labour turnover is fairly alright. We have strict labour laws that have been a deterrent in managing the labour force.

A bank's success in the future will depend on IT systems rather than branch networks. Do you think this situation will eventually come to Sri Lanka and is HNB ready to cope with it?

Technology is no longer a marketing tool. In Sri Lanka it will take a little time for the rural or the semi urban population to accept such a situation.

You have one associate venture capital firm. Do you see significant scope for venture capital in Sri Lanka? If so, will HNB invest in further venture capital funds?

No, because the priorities are changing. The government is setting up an SME bank and that will fill in the gap. Venture capital firms in the present context do not have much of a future. It will need a longer term, broad plan like in India.

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