Defying all expectations and displaying the remarkable ability to make a turnaround despite challenging circumstances, the Sri Lankan economy showed a gradual improvement starting from the second half of the year. Major financial institutions in Sri Lanka have demonstrated commendable financial results, displaying adaptability and resilience in a dynamic landscape despite economic fluctuations, shifting market conditions, and adverse global conditions. DFCC Bank, too, has been part of this upward trajectory displayed by the industry.

Global Challenges

Global growth has slowed to a dismal 3.0% in 2023, likely to dip to 2.9% in 2024. According to the International Monetary Fund (IMF), advanced economies are expected to slow down to 1.5% in 2023 and 1.4% in 2024. This spells further unwelcome news for countries such as Sri Lanka, which depend on exports to advanced economies.

The Ukraine conflict and the eruption of tensions in Gaza have added to an already adverse global economic outlook. Escalation of the situation in the region can drive up oil prices and freight charges.

Sri Lankan Economy

Though the Sri Lankan economy stabilised towards the latter part of the year, showing a positive growth of 1.6% in the third quarter of 2023, continued volatility in the external situation, unfavourable exchange rates, and the ban on the import of vehicles presented significant challenges during the course of the year. The contraction of the economy by 7.9% during the first half of 2023 due to issues flowing from the previous years delayed the anticipated rebound, leading to considerable turmoil while contributing to the overall uncertainty about the future.

Apart from global economic shifts, the Sri Lankan economy has faced additional challenges, mainly due to the depreciation of the Sri Lankan Rupee and the shortage of foreign currency during the early part of the year. Other notable impacts on the economy include El Niño-induced extreme weather events, including floods and droughts, leading to crop failures. Smallholders, lacking resources, have been particularly vulnerable to such events. Reduced disposable incomes stemming from inflation, higher exchange rates, and taxes have exacerbated a widespread issue: diminished demand across the business community.

Some sectors estimate a substantial 30-40% decline in demand. The SME sector, for instance, heavily reliant on subcontracting from larger garment players, has suffered significantly. With reduced demand, major businesses in the industry fulfil orders independently, leaving little for SMEs. While DFCC and the banking sector have provided support through loan restructuring and extended terms, there are limits to mitigating the impact of a substantial demand downturn.

On a positive note, the disbursement of the second tranche of the International Monetary Fund (IMF) Extended Fund Facility, along with funds from the Asian Development Bank (ADB), the World Bank (WB), and other international donor organisations, is expected to bolster Sri Lanka’s foreign currency reserves in the upcoming year. In December 2023, Sri Lanka’s foreign exchange reserves exceeded USD 4 Bn, with tourism earnings contributing USD 2 Bn to the national treasury.

Sector Performance and Resilience

It is heartening to note that the banking sector has remained resilient despite all the headwinds. The sector has not defaulted on any of its commitments, though some delays may have occurred. It was also able to meet the demand for short-term lending. Due to the depressed economic conditions, there was reduced demand for credit, leading the sector to be saddled with high levels of liquidity. The sector could make the required provisions for the investments in International Sovereign Bonds (ISBs) pending proposed debt structuring without endangering capital adequacy. Though this situation was not healthy from a broad economic perspective, it temporarily helped the sector tide over the situation. Regarding DFCC’s performance, despite the lacklustre condition of the economy, we have been able to record high profits, adequate liquidity, and robust capital adequacy. From an overall perspective, our reliance has always been on prudent management of limited resources and allocating resources where they were most needed.

Remittances

Since the liberalisation of the economy in the late 1970s, the gap between our imports and exports has been filled by remittances from expatriate workers. However, in recent years, the economy has encountered a significant setback as expatriates turned to informal channels to send their savings home. This has exerted upward pressure on the exchange rate. In response, DFCC and several other banks made concerted efforts to attract these remitters back to the formal banking sector. To achieve this, substantial incentives and concessions, such as loans unavailable in the informal sector, have been granted. We are delighted to report significant successes in the latter half of 2023, with remittances flowing back into banks, resulting in various positive outcomes, including loan repayments and improved liquidity.

As per the Central Bank of Sri Lanka (CBSL), Sri Lankan migrant workers have remitted a cumulative total of USD 5.4 Bn during the first 11 months of 2023. During the year up to November, over 275,000 Sri Lankans had sought job opportunities abroad, potentially enhancing foreign exchange inflows.

Sustainability

Sustainability has been ingrained into our ethos for many years, extending to many aspects of our performance. Environmental and social considerations form integral parts of the credit application screening process. We can assert with confidence that sustainability awareness permeates all levels and aspects of our operations, not just limited to senior management. The Bank rejects any funding proposal that poses social or environmental harm. Our focus on sustainability, coupled with established systems and procedures, has yielded tangible benefits.

DFCC’s accreditation by the Green Climate Fund (GCF) marks a significant milestone. GCF’s endorsement holds particular significance in the prevailing financial and economic landscape. This accreditation enables access to concessional funding for climate projects of up to USD 250 Mn in value. Following this accreditation, numerous foreign institutions have expressed interest in providing financing. However, given the country’s downgrade, these offers come at relatively high interest rates, and thus far, we have not accepted them. Nonetheless, the fact that these offers have been extended in the current economic climate is a point of pride. We are confident that, given the time, we can secure funding on more favourable terms.

Role of the Board

The Board of Directors played a pivotal role during these challenging times, adopting a proactive stance rather than a conservative “wait and see” approach. While exercising caution, the Board remained receptive to seizing opportunities as they arose. Simultaneously, we prioritised consolidation over immediate performance. Directors meticulously assessed management proposals, making necessary adjustments while endorsing promising ideas fostering close coordination between the Board and the senior management.

Governance

We have implemented modernised and robust governance frameworks and processes, aligning them with international standards, notably those set by the UN. Regular policy reviews and adjustments, particularly in human resources, are conducted to ensure adherence to these standards. Our governance protocols are strictly followed and upheld by a “zero exception” policy that surpasses regulatory requirements. Notably, we have already implemented enhancements mandated by the SEC/CSE ahead of schedule, highlighting our commitment to exceeding regulatory expectations.

Challenges Ahead

Technology remains foremost among the Bank’s priorities, given the evolving business and technological landscape, coupled with changing customer preferences and perceptions. Incorporating third-party technology is imperative despite legitimate concerns. Our robust infrastructure notwithstanding, there is a need for new payment and card systems.

With an attrition rate of approximately 20%, recruiting and training new staff has become essential, albeit with caution, to preserve our Company culture. Maintaining and instilling the DFCC culture in recruits is crucial to prevent dilution. While progress has been made, particularly at lower levels, more effort is required in the coming years to rebuild staff and culture, emphasising a service-oriented mindset.

Sector-wise, we prioritise the tea sector, especially supporting smallholders and tea factories. Women’s banking is another focal point, boasting one of the highest growth rates. Many rural women entrepreneurs still rely on informal money lenders, presenting an opportunity to integrate them into the formal sector.

Acknowledgements

During these challenging times, our achievements are a testament to the collective efforts of our stakeholders. The unwavering support of the Board and the Chief Executive has been invaluable in navigating obstacles. Our dedicated employees deserve recognition for their unwavering commitment to their roles. Oversight from the Central Bank has played a pivotal role in our success. Additionally, we express gratitude to our loyal customers for their continued trust and confidence. Each stakeholder’s contribution has been instrumental in guiding us through adversity and ultimately achieving success, highlighting our collaborative approach’s strength to face and overcome challenges together.

J Durairatnam
Chairman

19 February 2024