It is truly gratifying to note that the year under review counts among the most successful in DFCC Bank’s recent history, especially in terms of outstanding overall financial performance and profitability. While we must acknowledge that the prevailing high-interest rates of government securities and bonds was a contributory factor towards this achievement, the respective business lines have also recorded a commendable performance. Nevertheless, there remain several challenges that need to be addressed.

Our cost of acquiring funds remains notably higher than that of many competitors, stemming from our heritage as a development bank. As a result, our retail customer base is comparatively limited, leading to a lower CASA ratio in contrast to traditional retail banks. Over the past 12-18 months, addressing this shortfall has been a primary focus, resulting in significant strides towards expanding our customer base and attracting new clients for Current and Savings Accounts. The Bank has prioritised the growth of junior accounts, which are inherently of a long duration, thereby offering long-term financial stability and low-cost funding. The outcomes of this emphasis are expected to materialise in the forthcoming years.

The persistent high rate of impairment poses yet another obstacle to our advancement. With the lasting effects of the financial crisis, numerous businesses, particularly small and medium enterprises (SMEs), continue to face significant challenges. The Bank has made every effort to ease their burdens through restructuring and extending payment deadlines. However, the decrease in interest rates during the latter half of 2023 has significantly reduced net interest margins. Deposits are now being held for more extended periods, over 24 months, while loans are being re-priced at a much faster pace.

Previously accessible low-cost foreign funding has now diminished due to negative perceptions stemming from Sri Lanka’s sovereign default and adverse ratings by international rating agencies. However, the disbursement of the second IMF tranche, along with funding from international funding agencies, has alleviated the most urgent concerns currently facing the nation. Managing costs remains a continuous priority, particularly as many of our IT procurements are denominated in foreign currencies.

Focusing on People – Our Foremost Asset

The ongoing economic challenges and uncertainties, coupled with the escalating cost of living, have triggered the migration of our well-trained and qualified staff overseas. This has intensified competition among banks to retain their existing human resources, particularly at the mid and junior levels. Despite the implementation of advanced technology, the banking industry relies on high-quality human resources to effectively leverage such technology. Continuous upgrading of employees’ knowledge and skills is imperative.

With the easing of the pandemic, there has been a shift back to face-to-face training where appropriate, especially for new recruits, as physical training is deemed more effective in integrating them into the organisational culture. Presently, our training programmes are conducted by internal staff and occasional external resources. However, we are contemplating partnerships with reputable local and regional institutions for enhanced training opportunities.

The Bank extends its gratitude to our employees for their unwavering commitment and diligence, without which our accomplishments would have been unattainable. They have remained steadfast during challenging times, including power cuts, fuel shortages, limited public transport, and soaring inflation, which could have significantly impacted their personal lives. Despite the crisis, we successfully maintained operations across all branches. Moreover, the Bank has prioritised its obligations to its employees, regularly reviewing and adjusting remuneration. In November 2023, staff members received a substantial market-based salary adjustment, reflecting our commitment to fair pay and employee centricity.

IT and Digitalisation

Technology has always been a focal point for the Bank. The teething issues encountered with the new system implemented in late 2021 have been resolved. Our end-of-day and end-of-month processes have been streamlined to 3-4 hours, positioning us ahead of many industry peers.

Significant strides have been made in enhancing security. Substantial investments have been directed towards information and IT security, including the introduction of new systems and reinforcement of existing ones to bolster security measures. In today’s landscape, security breaches pose a major concern across all sectors, particularly within financial institutions. We adhere to all requisite standards and employ specialised personnel to assess our systems and pinpoint vulnerabilities. Moreover, the Bank has established a dedicated Security Steering Committee, which includes an external consultant, to oversee information security matters.

Digitalisation has not only enhanced the value proposition for our customers but has also significantly boosted the efficiency of our staff while concurrently reducing environmental impact by minimising travel requirements. With services like ATMs, CDMs, and Digital Wallets, over 90% of transactions are now conducted digitally. DFCC’s digital applications are cutting-edge, with our online banking platform consistently receiving awards. The Bank has been recognised as a market leader in payment and cash management systems and has garnered praise for providing top-notch service in this regard. These accolades are particularly gratifying as they reflect our customer-centric approach. We remain attentive to the needs of more traditional customers who may not be tech-savvy; they are always welcome to visit our branches. Our corporate banking application has gained traction among larger organisations, while efforts are underway to expand penetration among SMEs.

The Lanka Money Transfer platform, a proprietary system developed by DFCC, is utilised by seven other financial institutions for money transfers. Additionally, our wholly owned subsidiary, Synapsys, a key technological partner of the Bank, among many other innovations has created a margin trading solution that numerous institutions have adopted. These initiatives underscore our capabilities and contributions to the wider industry. DFCC is also prioritising innovative technology domains, recognising the growing significance of big data in banking. A dedicated team comprising specialists in data sciences, data management, analytics, and related applications is actively engaged. Moreover, the Bank operates a data warehouse that plays a significant role in customer segmentation, data analytics and MIS.

Despite the strides made in digitalisation, we remain vigilant and proactive. Several systems, including personal Internet banking, corporate internet banking, mobile wallets, and applications, are undergoing substantial revamping, and are slated for implementation in mid-2024. These enhancements are poised to enhance customer convenience and usability significantly. Furthermore, investments are being made in a new switch, which will serve as the backbone for all transactions.

Customer-Centricity

Customer service and customer-centricity remain at the heart and soul of DFCC Bank’s ethos, permeating all aspects of its operations. We are dedicated to instilling this mindset in our staff and in every facet of our product and service development and in back-office departments such as Trade Services and Credit Services. Through several off-site brainstorming sessions involving a diverse group of staff, we initiated a process of reimagining, discarding the status quo, and embracing fresh perspectives. The outcome has been a significant leap forward in fostering a culture of customer-centricity across the organisation, culminating in the launch of a comprehensive organisation-wide culture shift programme aimed at enhancing customer service and centricity. Scheduled to commence in 2024, this programme will be an ongoing endeavour driven by continuous customer feedback and a steadfast commitment to viewing things from the Customer’s perspective. Through all this, we aspire to become one of the most customer-centric organisations by 2025.

Credit Risk Management

We have strengthened the risk management function by setting up recovery hubs, which are geographically distributed. These would work with distressed customers, helping them restructure loans and obtain various other concessions. Impairment is a significant concern for the Bank, and the Recovery Hubs will help to alleviate this and more importantly work closely with our distressed customers as they navigate through the economic challenges confronting them, offering support and guidance along their path to recovery.

Sustainability

Our focused sustainability journey commenced in 2020 with the engagement of external consultants tasked with formulating targets, plans, and a roadmap. DFCC has embraced a strategic approach to sustainability across various sectors, including education, environment, elderly, and entrepreneurship. Supporting governance structures have been established, including the Executive Sustainability Management Committee responsible for monitoring implementation of plans under the sustainability strategy and reviewing progress on initiatives such as paper reduction and energy efficiency. Our ambitious environmental goals include zero internal paper usage by 2024 and achieving carbon neutrality by 2030.

A significant milestone this year was our accreditation by the Green Climate Fund (GCF), making us the first Sri Lankan entity to receive such recognition. This achievement followed a rigorous process spanning many years. GCF funding will support large-scale climate mitigation and adaptation projects at national level in line with Sri Lanka’s commitments and priorities. Currently the Bank is working on proposals for large scale rooftop solarisation and the electrification of public transport and three wheelers, and adaptation projects in fisheries and agriculture. However, there can be a considerable time lag before these projects materialise as they must be backed by extensive studies and analysis and must undergo a thorough evaluation by the GCF. The gestation period for these projects is estimated to be two to three years.

Looking Ahead

We are likely to encounter numerous obstacles in replicating the financial performance of 2023 in the coming year and beyond. High impairments persist and are expected to remain so until the economy fully recovers. The margins we derive from the Government Securities market will be depressed due to reduced interest rates. Although lending is gradually gaining momentum, we anticipate a further boost with additional reductions in interest rates.

We are also committed to expanding our reach among junior accounts, youth, and salaried individuals. There is considerable potential among women, particularly women entrepreneurs, a segment we have actively pursued. Educational sessions on enhancing business practices have been conducted for them. Additionally, our partnership with Doc990, offers our female customers free online medical consultations. Moreover, our collaboration provides special benefits for customers of Aloka, resulting in high levels of customer acceptance and engagement.

Acknowledgements

I extend my sincere gratitude to our committed employees who, despite personal challenges, have tirelessly supported the Bank’s operations, enabling us to meet our objectives. Appreciation is also extended to our Chairman, Board of Directors, and authorities from the Central Bank of Sri Lanka, including the Governing Board and the Monetary Policy Board, for their invaluable guidance. Lastly, heartfelt thanks are extended to our customers, the foundation of our existence, for their unwavering trust and support. Through their continued faith in us, we will navigate challenges and strive for excellence.

N H T I Perera
Chief Executive Officer

19 February 2024