Overview

In a demanding banking landscape, DFCC Bank demonstrated resilience amidst significant local economic disruptions. Proactive policy adjustments facilitated a notable reduction in historically high-interest rates aimed at bolstering economic growth and stabilising inflation. This initiative, which commenced in June 2023, envisaged a substantial and widespread decrease in lending rates across markets, aligning with the overarching goal of monetary easing. Complementing this effort, DFCC Bank promptly aligned with directives, swiftly reducing lending and deposit rates to ensure the effective transmission of monetary policy benefits to businesses and individuals. Moreover, the Bank strategically augmented profitability by optimising its investment portfolio, notably through increased holdings in high-yield government securities. These measures enabled the Bank to maintain profitability whilst providing much needed concessions to our valued customers during these challenging times.

In light of our robust financial performance in 2023, marked by substantial growth in total assets, deposit base, and profitability metrics, including a notable 187% increase in profit after tax, DFCC Bank remains steadfast in its commitment to prudent financial management and sustainable growth. Our strategic investments in high-yield government securities and focused efforts on fee income generation have bolstered our net interest income and non-funded business lines. Despite prevailing economic challenges, we have maintained resilient credit quality and fortified our capital position, as evidenced by improved equity ratios and compliance with regulatory requirements. Our dedication to innovation and customer-centric values continues to be recognised, reaffirming DFCC Bank’s position as a leader in the banking sector. Looking ahead, we remain focused on driving inclusive growth, fostering sustainability, and delivering value to all stakeholders.

A significant milestone this year was our accreditation by the Green Climate Fund (GCF), making DFCC Bank the first entity in Sri Lanka to receive such recognition. We are also honoured to receive prestigious accolades such as the “Euromoney Cash Management – Market Leader Award 2023” and the Merit Award for the “Green Brand of the Year” at SLIM Brand Excellence. These recognitions underscore our unwavering dedication to sustainability, innovation, and customer-centric values. As we continue to revamp our Corporate and Retail banking digital platforms and implement concessionary lending schemes to support our customers during challenging times, we remain committed to serving as the Bank for Everyone, supporting sustainable and social entrepreneurship and driving positive change in the communities we operate and serve.

Income Statement Analysis

Profitability

The Bank’s profit after tax increased by 187% to LKR 7,220 Mn, and the earnings per share (EPS) increased by 156% to LKR 17.27 during 2023.

DFCC Bank PLC, the largest entity within the Group, reported a Profit Before Tax (PBT) of LKR 10,960 Mn and a Profit After Tax (PAT) of LKR 7,220 Mn for the year ended 31 December 2023. This compares with a PBT of LKR 2,439 Mn and a PAT of LKR 2,513 Mn in the previous year.

The Group recorded a PBT of LKR 12,508 Mn and PAT of LKR 8,659 Mn for the year ended 31 December 2023 as compared to LKR 3,112 Mn and LKR 3,042 Mn, respectively, in 2022. All the member entities of the Group made positive contributions to this performance. The Bank’s Return on Equity (ROE) improved to 12.19% during the year ended 31 December 2023 from 5.04% recorded for the year ended 31 December 2022. The Bank’s Return on Assets (ROA) before tax for the year ended 31 December 2023 was 1.82% compared to 0.46% for the year ended 31 December 2022.

The Bank’s total tax expense, which includes Value Added Tax (VAT) and Social Security Contribution Levy (SSCL) on financial services and Income Tax is LKR 6,927 Mn for the year ended 31 December 2023. As a result, the Bank’s tax expense as a percentage of operating profit for the year stood at 48.96%.

Net Interest Income

The tight liquidity conditions in the domestic money market have resulted in continuously rising market interest rates in early 2023. While the higher interest rates led to a contraction in the lending portfolio, strategically, the Bank increased its investment portfolio in high-yielding government securities, which led to an overall improvement in Net Interest income (NII). However, with the market guidance provided by the Central Bank, along with improvement in liquidity conditions of the domestic money market in line with the relaxed monetary policy stance of the Central Bank, both deposit and lending interest rates have continued to adjust downwards. Accordingly, the Bank has reduced both lending and deposit rates to align them with the monetary directions to ease monetary conditions for individuals and businesses adequately and swiftly, thereby supporting the envisaged rebound of the economy. While lower interest rates may have resulted in reduced interest income and expenses, in nominal terms, Net Interest Income (NII) has continued to improve as a metric during the period under review as a result of the Bank’s strategy of investing in high-yielding government securities.

Strategically, the Bank thus increased its fixed-income investment portfolio, contributing significantly to increased interest income and The Bank’s Net Interest Income (NII), which is its core business, increased by 18% to reach LKR 31 Bn by the end of 2023. The interest margin increased from 4.96% in December 2022 to 5.18% by December 2023.

Fee and Commission Income

The Bank’s dynamic strategies and the efforts of its dedicated teams led to increased remittances, trade-related commissions, and other fee income lines, which contributed to the increase in non-funded business during the period. Fee income generated by credit cards also increased significantly, in line with the volume of transactions. Accordingly, net fee and commission income increased by 36% to LKR 3,905 Mn for the year ended 31 December 2023, compared to LKR 2,877 Mn for the comparative period in 2022.

Impairment Charge on Loans and Other Losses

The impaired loan (stage 3) ratio increased from 4.36% in December 2022 to 7.03% as of 31 December 2023, continuing the prevalent trend amidst the present economic conditions. However, the positive developments in the macroeconomic environment coupled with the Bank’s concerted efforts in recoveries resulted in reducing the impairment charge for the year 2023 compared to the year 2022. To address the current and potential future impacts of the present economic conditions on the lending portfolio, the Bank made adequate impairment provisions during the year by continuing to calibrate internal models to account for unseen risk factors in the future, including additional provisions made for the Bank’s exposure to risk elevated sectors.

The Bank made significant judgments based on the information available at the reporting date to estimate the recoverable value of foreign currency-denominated investment securities issued by the Government of Sri Lanka. Accordingly, an impairment charge has been recognised to maintain a provision cover of 50% on the above investments.

Accordingly, with these provisions to address the additional risks in the economic environment, the impairment charge was recorded at LKR 13,985 Mn for the year ended 31 December 2023, compared to LKR 17,041 Mn in the comparable period.

Operating Expenses

Operating expenses for the year ended 31 December 2023 increased to LKR 11,720 Mn compared with LKR 10,117 Mn during the corresponding period in 2022, primarily due to the increase in inflation. However, the Bank has taken numerous cost control measures within its operations, curtailing operating expenses and managing them at these levels. The Bank achieved a healthy 29.41% cost/income ratio in 2023 compared to 32.79% in 2022.

Other Comprehensive Income (OCI)

Changes in the fair value of investments in equity securities and fixed-income securities (treasury bills and bonds) and movement in hedging reserves are recorded through other comprehensive income. Due to the application of hedge accounting, the impact on the total equity of the Bank due to exchange rate fluctuation was minimised. A fair value gain of LKR 7,016 Mn was recorded on account of equity securities outstanding as at 31 December 2023. The increase in the share price of Commercial Bank of Ceylon PLC during the period was the main contributor to the reported fair value gain in equity securities. The favourable movement in treasury bill and bond yields also resulted in a fair value gain of LKR 5,932 Mn during the year.

Financial Position Analysis

Assets

Despite the challenges faced by the economy and the banking sector, DFCC Bank’s total assets increased by LKR 74.6 Bn, recording a growth of 13% from December 2022. Aligning the Bank’s growth strategy to the present economic climate by increasing investment in fixed-income securities, combined with positive fair value movement in both fixed-income securities and equity securities, has contributed to a 113% increase in investment in financial assets at fair value through other comprehensive income as of 31 December 2023 compared to the balance as of 31 December 2022. With increased provision for expected credit losses, appreciation of the Sri Lanka Rupee compared to 31 December 2022 and considerable economic challenges, the net loan portfolio has recorded LKR 349 Bn as at 31 December 2023, which is 6% lower than the balance as at 31 December 2022.

Liabilities

The Bank’s deposit base experienced a growth of 9.97% during the year, recording an increase of LKR 37 Bn to LKR 407 Bn, up from LKR 370 Bn as at 31 December 2022. This resulted in recording an improved loan-to-deposit ratio of 96.92%. Further, the CASA ratio was 23.79% as at 31 December 2023. The Bank’s funding costs were also contained using medium to long-term concessionary credit lines, primarily used to grow the lending portfolio and provide much needed concessionary funding to our customers. Considering these concessionary term borrowings, the CASA ratio further improved to 33.57%, and the loans-to-deposit ratio improved to 84.47% as at 31 December 2023.

Equity and Compliance with Capital Requirements

DFCC Bank’s total equity increased to LKR 68 Bn as at 31 December 2023, supported by favourable movements in the equity portfolio and fixed income security portfolio classified as fair value through other comprehensive income, and positive movements in the hedging reserve, together with the recorded profit after tax of LKR 7.2 Bn. Accordingly, Tier 1 and Total Capital ratios improved to 11.490% and 13.511%, by 31 December 2023, compared to 10.085% and 13.148% respectively, as at 31 December 2022. The Bank’s Net Stable Funding Ratio (NSFR) was 124.60%, and Liquidity Coverage Ratio (LCR) – all currency – was 597.47% as at 31 December 2023, compared to 126.55% and 202.34%, respectively, as at 31 December 2022. All these ratios were thus maintained well above the minimum regulatory requirement.

Credit Quality

In terms of the Bank’s prudent lending policies, the Bank did not pursue aggressive growth, particularly in sectors that exhibited stress. During the year, the Bank had moderate growth in its loan book covering corporate, retail, and small and medium-sized business segments. Expanding into new geographical areas and customer segments increased the challenge of maintaining a sustainable risk profile. The Bank continued to improve its pre and post-credit monitoring mechanisms through changes to internal processes and timely recovery action.

Dividend Policy

The Bank’s dividend policy seeks to maximise shareholder wealth whilst ensuring there is sufficient capital for expansion as it leverages its island-wide presence and investments in technology. Accordingly, the Board of Directors has approved a final dividend of LKR 5.00 per share, which will consist of LKR 3.00 per share in cash and LKR 2.00 in the form of a scrip dividend for the year ended 31 December 2023, balancing the needs of shareholders with business plans. Accordingly, the dividend pay-out ratio for the year ended 31 December 2023 is over 31% on the distributable profit.

Group Performance

The DFCC Group consists of DFCC Bank PLC and its subsidiaries: DFCC Consulting (Pvt) Limited (DFCC Consulting), Lanka Industrial Estates Limited (LINDEL), Synapsys Limited (Synapsys), its joint venture company Acuity Partners (Pvt) Limited (Acuity), and its associate company National Asset Management Limited (NAMAL). LINDEL is a 31 March reporting entity, whilst the others are 31 December reporting entities. For the purpose of consolidated financials, 12 months results from 1 January to 31 December 2023 were accounted for in all Group entities. Financials of the 31 March entity were subject to a review by its External Auditor.

The Group made a profit after tax of LKR 8,659 Mn during the year ended 31 December 2023. This is compared to LKR 3,042 Mn made in the year 2022. DFCC Bank accounted for the majority of the Group profit, with profit after tax of LKR 7,220 Mn, while LINDEL (LKR 356 Mn), Acuity (LKR 2,279 Mn), Synapsys (LKR 49 Mn), and DFCC Consulting (LKR 0.31 Mn) too contributed positively by way of profit after tax to the Group. In the previous year, Synapsys, Acuity, DFCC Consulting, and LINDEL reported profit after tax of LKR 56 Mn, 332 Mn, LKR 24 Mn, and LKR 224 Mn respectively. The associate company, NAMAL, contributed LKR 5 Mn, to the Group, an increase from LKR 0.74 Mn in the year 2022.

Economic Value Created and Distributed – Bank

	For the year ended 31 December 2023		For the year ended 31 December 2022
	LKR Mn	%	LKR Mn	%
Economic Value added
Interest income	96,922		69,863
Net fee and commission income	3,905		2,877
Net gains from trading	1,055		63
Net gains from derecognition of financial assets	2,839		99
Net other operating income	828		1,291
	105,549		74,193
Economic Value Distributed
To Lenders as Interest	65,697	62.24	43,342	58.42
To providers of supplies and services	5,616	5.32	4,513	6.08
To employees as emoluments	4,778	4.53	4,444	5.99
To Government as Taxation	7,119	6.75	1,205	1.62
To community (CSR related activities)	11	0.01	9	0.01
To shareholders as dividends	805	0.76	962	1.30
Retained in the Business
Depreciation and amortisation	1,124	1.06	1,125	1.52
Reserves	6,414	6.08	1,552	2.09
Provision for losses	13,985	13.25	17,041	22.97
Total Economic Value distributed	105,549	100	74,193	100

The Backdrop

The year 2022 was traumatic for the entire banking sector, the economy, and society in general. Many of the issues that originated during this period carried over into 2023. During the first half of the year, the high-interest rates, unprecedented in recent times, continued. Though there was some reduction of rates in the second half, there were nevertheless severe constraints of reduced disposable income in the population due to the high inflation in the previous year and steep taxation imposed by the Government. Products such as housing loans, vehicle loans, and car loans have suffered a severe contraction, as has the SME sector.

New Asset Products

The Retail Banking Division successfully launched several innovative products tailored to the environment’s exigencies. One was the “Aduwenakota Aduwena” leasing product. The prevailing scenario of declining interest rates discourages customers from taking leases as they fear they will incur a loss when rates decline further. Our new concept provides for rates to be reduced after one year. Backed up by an aggressive marketing campaign, within two months of launching, we were able to disburse more than LKR 2 Bn worth of leases. Another product tailored to the prevailing economic conditions was the structured housing loan, which gives the client a choice of repayment options, among which they could select according to their cash flow situation. Some of the options are:

• A step-up payment plan where they would pay a reduced amount in the first year, which would be gradually increased in subsequent years
• A five-year grace period for capital repayments and in this period, they would pay only the interest
• A payment plan to pay in lump-sum instalments
• The residual value plan, where we would allow up to 50% of the value to be paid as the last instalment. This may be attractive for customers who are buying apartments as an investment.

The product was promoted with appealing videos.

Liabilities

In 2002 and early 2023, customers enjoyed the benefits of very high rates on FDs, which reached as high as 30%. However, the rates plummeted during 2023. Despite the reduction in rates, customers kept investing in FDs, presumably due to a lack of other investment opportunities. Currently, the retail liabilities have achieved a growth of around 13% during the year.

A new product introduced was the DFCC investment planner, a savings-based product. It caters mainly to customers with long-term needs such as providing for children’s higher education, children’s marriage, parent’s medical expenses, and retirement. The savings could be made in both rupees and selected foreign currencies. Interest rates higher than those prevailing in the market are guaranteed. We have even provided a calculator through which they can identify the instalment they wish to credit on a monthly basis. We help them to reach their targets over a 5-year or 10-year time frame or even longer. For high-net-worth customers, we provide them the opportunity to have detailed discussions, taking into account any short-term commitments and their long-term objectives. We consider their actual lifestyles and aspirations and help them find investment solutions that meet their needs.

The children’s savings product, DFCC Junior, was revamped, and another new product, DFCC Junior Plus, was also introduced. For DFCC Junior, a new gift structure was introduced with different gifts earned based on deposit amounts – a slab system based on deposits ranging from LKR 1,000 to LKR 2.5 Mn determines the gifts. A variety of gifts were given, including gift vouchers, e-vouchers, and value credits. DFCC Junior Plus gives a 10% interest rate on savings accounts, a rate unmatched in the market.

Several campaigns were launched during the year with the active participation of our staff. One is the Kasi Wasi campaign, which is currently in its second phase. For FDs we have also launched a product offering a very attractive rate for 3-month FDs, which no other Bank equals. This has been very successful since some customers are now wary of investing in fixed deposits due to prevailing uncertainties regarding rates and other opportunities available in the market.

We have also introduced the virtual opening of accounts so that customers can avoid physical visits to branches. This benefits all customers, including youth who are accustomed to digital transactions, allowing the convenience of banking from home while avoiding travel, traffic, and wait-times to access services. Similarly, customers could also contact their product and account managers to avail themselves of our services without in-person presence. There has been remarkable growth in mobile and internet banking; continuing a trend that started with the COVID-19 pandemic and the fuel crisis that followed.

We conducted several campaigns to increase deposits, incorporating incentives for staff who were empowered to play a leading role. These campaigns bore fruit, with an increase of around 10% in deposits.

DFCC’s mobile banking service, M-Teller, has been a resounding success. This doorstep banking service is operated by a member of the Bank’s staff who accepts cash deposits through a mobile device. Monthly deposits have grown from LKR 1 Bn at the beginning of the year to LKR 2.4 Bn in December. Over the same period, the number of operators has grown from 52 to over 100.

Product-wise Performance

To take a brief look at the product-wise performance within the retail sector:

• Housing loan customers, especially those on floating rates, were adversely affected, with rates reaching up to 30%. The Bank extended a helping hand through moratoriums for a year, but the customers still had to incur much higher loan instalments than anticipated. New customers also faced the problem of escalation in housing and building costs, which resulted in negative growth of the product line.
• The vehicle market had similar issues, with vehicle prices rising due to the ban on vehicle imports; this resulted in deficient demand. However, we are pleased to note that there has been a remarkable recovery in leases after the reduction in interest rates. While leases to the value of around LKR 50 Mn were recorded in the first six months of the year, since then, around LKR 600 Mn has been added.
• Pawning was a product that performed remarkably well, both in 2022 and 2023. In 2023 we have recorded a growth of 35%.
• The SME sector has had a mixed record. Tourism has recovered well in certain areas, and we support it selectively. The agriculture sector was promising, and we identified it as an area to support. The apparel sector had problems with dampened world demand; nevertheless, we give it cautious support as an export industry. Much of the industrial sector, which produces for the local market, is still in the doldrums due to reduced consumer demand, even though import restrictions have been relaxed.

DFCC generally extended concessions to the SME sector through reduced interest rates, moratoriums, and grace periods on capital repayment. We had to perform a balancing act between achieving a minimum rate of return and keeping SME enterprises afloat.

Supporting Women and Financial Inclusion

We have not neglected our social responsibility to empower women financially. Under our Aloka product, we have provided both financial and non-financial benefits. In addition to higher interest rates and rewards on important occasions, we have conducted forums for women entrepreneurs at a regional level. Participating women have been educated on economic conditions and the facilities available to improve and expand their businesses. Those who opt to carry out pawning transactions through the Aloka account are offered special rates. An indication of the success of Aloka is that around 50% of new accounts opened have been Aloka accounts.

We promote financial inclusion and seek to draw in more business customers through our branch network, which the Bank is well able to support. We are focused on developing need-based banking and seeking out high-quality customers. Market segments, such as tea smallholders, present opportunities to be explored We are also very receptive towards start-up enterprises, provided they can develop a viable business plan. Our financing scheme, DFCC Freelancer, supports those in the informal sector providing services, perhaps without formal business registration. Freelance IT developers and business service providers are good examples.

Collaborating with Non-banking Partners

DFCC Bank has established a highly productive partnership with AIA Insurance, initiated in 2014. This collaboration has resulted in the successful launch of multiple products tailored to meet the diverse needs of our valued customers. (refer to Bancassurance pages 83 to 85 for details).

Looking Ahead

From a macroeconomic perspective, the most significant uncertainty we face, in common with the rest of the banking sector, is the economy’s future growth. A substantial growth in exports is an opportunity we are looking forward to. Relaxing import restrictions on selected capital assets and raw materials is expected to create growth opportunities for SMEs in Sri Lanka. Moreover, with the reduction in interest rates, an increase in demand for loans can be anticipated in 2024.

Given the temperament of most retail customers and limited investment opportunities, the banking sector is likely to continue drawing fixed deposits. Uncertainties prevail, but we have reasonable hope for moderate growth in retail banking in 2024.

The MSME Department has two primary market segments under its purview. One is the micro and small enterprises. The other is the agriculture sector, which includes a slightly larger scale, the medium-sized farmers. Significantly, about 60% of our exposure is in the agriculture sector.

Progress During the Year

In 2023, some of the challenges we faced in 2022 were alleviated, particularly in the agriculture sector, such as farmers not having access to fertiliser. However, many challenges continued in the small business segment, such as the recovery issues that originated with the COVID-19 pandemic in 2020. Reduced purchasing power in the hands of consumers led to the squeezing of demand. The interest rates of 25-30% that prevailed for the first part of the year were beyond the capability of the small business sector. Even with reduction in the latter part of the year, rates were out of reach for many of the Bank’s small-business customers. Considering the high risk involved, we had to be conservative in our lending, resulting in almost ceasing of long-term lending. However, in the last quarter of the year, the clamp on long-term lending was relaxed. There are still issues of depressed demand in the local market. So, the small business sector is naturally wary about expansion; nevertheless, there is a pickup in demand for working capital.

The agriculture sector performed much better. This includes a variety of segments including, plantation crop smallholders, dairy farming, spices, and various food crops. Some problems that prevailed in 2022, such as the unavailability of fertiliser for farmers, have been alleviated. Furthermore, the agricultural sector benefited from concessionary schemes throughout the year under review.

DFCC has a strong presence in the dairy farming sector, with many customers in the North Western Province, North Central Province, and the Uva Province, among others. We are also active in food crop segments such as paddy, maize, green gram, and vegetables. Many concessionary schemes have boosted our lending to the agriculture sector, such as the Central Bank refinance scheme and the ADB scheme for tea smallholders and dairy farmers. Our target for 1,500 new customers for the year was achieved in 2023, thanks to the performance in the agriculture sector. Another financing line that could be very lucrative is the Agriculture Sector Modernisation Project (ASMP), sponsored by the World Bank. Significant projects in products such as bananas, groundnut, and papaya are coming under the umbrella of this programme.

Developing Entrepreneurship Among Migrants

There has been a marked trend towards increased migration among the younger generation recently. Nevertheless, a section still wishes to retain their roots in Sri Lanka and return to the Country at some point. One innovative step that is in progress, with a futuristic mindset, is to tap the capital and latent entrepreneurial aspirations that some of these migrants have. If they are prepared to invest some of their capital in a business venture, we can provide a loan to bridge any gap.

To gain the confidence and loyalty of the migrants, the Bank launched the “Ethera Saviya” Scheme, where we finance their pre-departure expenses and possibly the first few months of their stay in their new country. The migrants will also be encouraged to send their foreign currency remittances through DFCC, resulting in a mutually beneficial relationship.

Value Chain Financing

DFCC’s Value-Chain Financing Model targets processors and large-scale milk collectors in the dairy and agriculture smallholding segments. Identifying industries that hold promise for the future, we take a sector-wide approach that goes beyond the individual customer. The Bank has developed a clear system for evaluation, processing, and disbursement, which has been very effective, while leaving room for refinement and development. Disbursement of group loans has streamlined the process and reduced administrative costs. This year, we have disbursed about 700-800 loans to dairy farmers. The Smallholder Agribusiness Partnership Programme (SAPP) loan scheme has also greatly benefited dairy farmers. SAPP was established under the Ministry of Agriculture to develop agricultural value chains in the country. The refinancing fund is managed by the CBSL, where DFCC is one of the main PFIs granting loans to eligible farmers recommended by value chain promoters, at a concessionary long-form rate of 6.5%. DFCC is the leading PFI of the programme in financing the dairy sector in collaboration with leading dairy manufacturers in the country.

Supporting Female Entrepreneurs

Approximately 40% of our customer base comprises women, underscoring our commitment to impartiality and gender equity in our financing endeavours. While our internal policies adhere to a non-discriminatory and gender-neutral framework, it is worth noting that specific external funding programs accessible to the Bank, such as the ADB grants, feature particular provisions tailored to support women entrepreneurs.

External Credit Lines

We have several refinancing schemes for the MSME sector. The Asian Development Bank (ADB) long-form schemes for tea smallholders and dairy farmers are continuing. The Central Bank New Comprehensive Rural Credit Programme (NCRCP) for food crops also exists. There are 33 eligible crops under this scheme, including paddy.

Capacity Development for MSMEs

MSMEs encounter capacity constraints across various functional domains, including accounting, finance, marketing, and export. While direct provision of such services falls beyond the scope of our operations, we are committed to facilitating access to them. In 2023, we formalised a memorandum of understanding (MOU) with the Industrial Service Bureau (ISB) in Kurunegala. Primarily focused on industrial development within the North Western Province. Boasting a nation-wide presence, ISB collaborates with us to address our clients’ capacity deficiencies by leveraging structured capacity-building initiatives and a pool of qualified resource personnel. This collaboration has led to establishing a dedicated platform for capacity enhancement. Tailored sessions are conducted in specific regions targeting aspiring entrepreneurs and those seeking to enhance their entrepreneurial acumen. Over the course of this year, we have organised four such programmes in Morawaka, Bandaragama, Kurunegala, and Ratnapura, engaging expert resource personnel to facilitate these sessions. Furthermore, we maintain close collaboration with the Small Enterprise Division, a governmental entity specialising in identifying and nurturing entrepreneurial talent.

Ratnapura Programme

 

Kurunegala Programme

Typically, we receive approximately 300-400 requests for these programmes. Following a rigorous screening process, we refine the pool to approximately 100 applicants who align with our criteria, resulting in a roughly 75-80% participation rate. Employing a structured model, we assess participants’ current standing to identify any existing capacity gaps, focusing on marketing, financial management, and customer support. Our sessions, facilitated by expert resource personnel, span two hours and are designed with interactivity and engagement in mind. After the programme, and without undue pressure, many participants establish accounts with us. This initiative has enabled us to cultivate a profitable customer segment while delivering tangible value through the project.

Supplier Financing

The prevailing challenge of high-interest rates has somewhat hindered direct progress in this area. Additionally, it is essential to clarify that the MSME mandate does not extend to large exporters, as this segment falls under the purview of the SME Division. Nonetheless, we have exerted an indirect influence through our supplier financing framework, achieving notable success with cinnamon as a prime example. Typically, exporters face a specific time-lag before settling supplier payments, creating a financial gap. Our institution intervenes by providing financing to bridge this gap, ensuring a seamless supply chain for exporters. We are considering extending this successful model to other agricultural commodities, such as coconut.

In another collaboration, we are actively supporting a company based in Rajanganaya that exports “ambul kesel” (sour banana), formed by approximately 300 farmers holding enterprise shares. Our involvement aims to establish mechanisms that ensure their long-term sustainability. Currently, we oversee approximately 20 similar enterprises under our umbrella. These entities benefit from established market access, particularly in countries like the UAE.

Another noteworthy success story is the Scotch Bonnet project for chillies in the Talawa area, initiated in response to a requirement identified by the Mahaweli Authority. This project has brought together approximately 15 farmers, poised to complete their inaugural export shipment by December. This exemplifies our ability to foster collaboration among diverse stakeholders to achieve shared objectives.

Digital Banking

The advent of digitalisation has significantly impacted the MSME sector. As part of our key performance indicators (KPIs), our team actively promotes digitisation initiatives, including adopting point-of-sale (POS) machines. Recognising that some groups may hesitate to engage with our digital banking services, we offer alternative options to accommodate their preferences. For example, we established the “Wyapara Hamuwa’’ forum and integrated it into a WhatsApp Group. Through a webinar session, we raised awareness among participants about the various digital options available. This approach allows us to gradually introduce them to digitalisation, including Internet banking, mobile banking, virtual wallets, and POS machines. We have found this incremental method to be more effective than aggressively pushing products onto customers.

Contribution of the Branches

Branch staff represent the frontline interface with SMEs, often stationed in areas beyond urban centres. They understand the capabilities and challenges inherent in the MSME landscape. We derive valuable insights from these branches, which serve as conduits for introducing potentially profitable customers, including large entities requiring supplier financing. Typically, leads originate from the branches. Subsequently, we employ a decentralised approach, moving from a central hub to the outskirts engaging directly with farmers or entrepreneurs. Through these interactions, we assess their requirements, address concerns, and tailor financing solutions to meet their needs.

Looking Ahead

We can look forward to 2024 and beyond with a fair degree of optimism. We expect the macroeconomic challenges that still prevail to ease off from 2024 onwards and a conducive environment for the MSME sector to emerge. Improvements to our systems are still needed, for example, in screening customers. Even in agriculture, we need to look more intensively for progressive farmers with growth potential willing to learn and innovate. They need to have, or be able to develop, the ability to combine agricultural technical skills with a business mindset; they need to have the mindset to embrace technology. To generate synergies, we need better networking with third parties, the private sector and government institutions. We need to engage experts of the highest calibre and use them to grow our business and portfolio. With the Country’s situation improving, we can expect a more considerable inflow of donor funds. All these developments should lead to more significant benefits for the Bank, our stakeholders, and the Nation.

Strategy

At the outset of the year, the credit card business encountered a series of challenges, including the lingering effects of social unrest, a significant rise in tax rates, and persistently high interest rates from 2022. Consequently, a considerable portion of the population experienced a notable reduction in disposable income, leading to cutbacks in discretionary spending. Many credit card holders encountered difficulties in meeting payment obligations, prompting the issuance of additional relief measures in addition to those initiated by the Central Bank.

Against this challenging economic environment, the Bank undertook a comprehensive reassessment of its onboarding strategy, emphasising quality over quantity, particularly targeting customers who regularly deposit their salaries with the Bank. In response to escalating inflationary pressures, the minimum salary requirement for credit card eligibility was revised upwards from LKR 35,000/- to LKR 100,000/-. Adaptations were made to capitalise on opportunities amid adversity. Staff members were cross-trained and upskilled to effectively address evolving demands, providing them with opportunities for professional growth and enhancing job satisfaction.

Furthermore, the Bank prioritised the robustness of its systems and processes, initiating the Payment Card Industry Data Security Standards (PCIDSS) certification process, which is currently underway and expected to be completed by next year.

Card Issuing and New Products

The expansion strategy emphasised the need to focus on companion and supplementary cards along with the preparation to issue cards for the SME sector. There is a broad agreement that SMEs are the entry point to take the card culture to the rural population. In the rural hinterlands, SME entrepreneurs can show evidence of a stable income. Another segment the Bank targeted is freelancers, who have now become a sizable group. This product was launched in December 2023.

There is also a section of the population for whom credit cards are not the appropriate product, possibly because they are wary of getting into debt. They strongly prefer debit cards, and this concentration was also made by offering discounts during the season.

Entering into and leveraging partnerships is another expansion strategy. The Bank is working on partnering with different parties to onboard the unbanked and underbanked populations. The large customer base will be offered banking services through primarily issuing a co-branded debit card. The Bank entered into a partnership with Lanka IOC to issue a co-branded credit card, the issuance of which will commence next year. Cardholders are given an additional incentive through a cashback above the normal. The Bank revamped the Pinnacle Credit Card product with additional benefits by moving it to the Mastercard platform. The Bank has also made significant inroads into the corporate credit card market by issuing fleet-based fuel cards. Thus far, the card has mainly been geared to paying for travel and entertainment expenses. Business Payments Solution Provider (BPSP) will enable corporate clients to pay their expenses from next year, including utility bills and supplier expenses.

Promotions

Throughout the fiscal year, the Bank executed a series of promotional initiatives, notably focusing on April and year-end, yielding considerable success. One noteworthy campaign was the Mastercard Credit Card draw, where eligible cardholders surpassing a specified expenditure threshold were entered into a draw, with winners receiving ICC World Cup tickets for select Sri Lankan matches. Additionally, the Bank’s collaboration with an authorised Apple product partner for the iPhone launch garnered significant pre-order success. Promotions such as the Mother’s Day Aloka Card offer and the 50% discount promotion at Shangri-La Hambantota also achieved notable success.

Furthermore, expanding the affinity program through partnerships with esteemed educational institutions like St. Sebastian’s College, Moratuwa, and Isipathana College, Colombo, further underscored the Bank’s commitment to community engagement.

Merchant Acquisition

The Bank adopted an aggressive yet prudent approach to pursue merchant acquisition objectives. Leveraging its branch network, direct sales force, and aggregator partnerships, the Bank successfully onboarded new merchants, with direct acquisitions contributing to the Bank’s Current Account and Savings Account (CASA) growth. Notably, akin to its approach in credit card acquisitions, the Bank exercised meticulous scrutiny in selecting merchants, prioritising quality over quantity to ensure sustainable growth.

The strategic focus has been on engaging second-tier merchants, where the Bank can offer competitive advantages in service quality and pricing. Concurrently, the Bank has maintained its presence within the micro-merchant segment, fostering growth in digital transactions. Moreover, enhancements such as incorporating QR code capabilities on Point of Sale (POS) machines and integrating China UnionPay acceptance have empowered merchants to facilitate multiple payment methods seamlessly.

Introduction of the Internet Payment Gateway in mid-2023 has proven instrumental in attracting new merchants, aggregators, and prospective partners seeking to collaborate with the Bank and expand their global footprint.

Looking Ahead

In 2024 and beyond, the Bank is committed to further diversifying its portfolio by venturing into new business avenues and market segments while reinforcing existing partnerships. Focus will be directed towards the Small and SME sector, with strategic initiatives aimed at enhancing both credit and debit card offerings explicitly tailored to meet the evolving needs of this market segment and the broader requirements of our valued customers and partners.

Further expansion of cardless transactions, including innovative solutions such as payment links and QR code options, will be a priority. These initiatives resonate particularly well with small-scale merchants due to their cost-effectiveness compared to traditional credit and debit card transactions, rendering them an increasingly preferred mode of payment acceptance.

The collaborative venture with AIA Insurance is the cornerstone of our bancassurance – Life business, facilitating the promotion of life insurance policies to our esteemed clientele. This strategic partnership affords customers seamless access to a comprehensive suite of insurance products, complementing our core banking offerings and delivering an integrated one-stop solution. Under our bancassurance umbrella, we offer two principal categories, life insurance and general insurance, conveniently accessible across our extensive network of 137 branches.

Digital Technology for Enhanced Effectiveness

We are advancing towards the digital distribution of life insurance, leveraging widespread digital adoption among customers, particularly spurred by the transition to remote work necessitated by the pandemic. Additionally, our move towards digitalisation is prompted by a shortfall in necessary human resources, exacerbated by the turnover rate within the insurance distribution channel, notably pronounced in the Northern and Eastern regions.

We have embraced video conferencing technologies such as Zoom and Google Meet to address these challenges. This allows us to centralise our skilled human resources at the Head Office while establishing remote connections with branch staff and customers. Through interactive online platforms, we efficiently handle customer inquiries, resolve issues, finalise quotations, and close deals, thereby streamlining operations.

Our Bancassurance Unit is piloting projects to enhance technology adoption among branch staff and customers. By conducting technology-driven interactions with customers in the presence of branch managers or relationship managers, we instil a greater sense of confidence in our offerings. Encouragingly, this approach has garnered significant acceptance among potential customers.

Previously, when interest rates were notably high, insurance was often overlooked as an investment option, given the lucrative short-term returns offered by fixed deposits. However, with the stabilisation of deposit interest rates, which align more closely with our investment returns, there is a renewed interest in insurance as a long-term investment vehicle. Moreover, insurance’s inherent risk mitigation benefits further underscore its attractiveness as an investment option.

Obstacles to Increasing Market Penetration

The value of insurance premiums in Sri Lanka as a percentage of GDP amounted to 1.39% in 2020, compared to the international average of 6.8%, and in Taiwan, it accounted for almost 15%. The number of insured persons also stands at about 10–13% of the population. This is due to the fact that most Sri Lankans regard life insurance strictly as an investment that offers a specific yield at maturity while ignoring its primary purpose of mitigating risk in the event of death or disability. This stands in contrast to the amounts people are willing to pay for motor insurance, where they have absolutely no returns at the end of the period of insurance.

While long-term life insurance products can be categorised as investment products due to their guaranteed returns at maturity, genuine life insurance products meet the customer’s long-term financial security needs. This includes pension products and higher education products, which offer funds for children’s education in case of the death or disability of a parent. We also provide short-term products with higher returns than life insurance, which is generally low, and pension products offer moderate returns.

Further improvements in sales to SME customers can be achieved by improving their awareness of the benefits of bancassurance products, as their current focus is limited to managing their day-to-day affairs, with a limited emphasis on the future. We anticipate a high level of demand for our products from this sector, as there is an inherent need for insurance policies which meet their requirements.

Product Innovations to Meet Changing Needs

In the past, we introduced an internal recognition programme known as the “CEO’s Club’’ to acknowledge and reward outstanding staff members. This initiative has transformed and is now relaunched as the “CEO’s Summit,’’ a collaborative effort between the CEOs of DFCC and AIA.

Additionally, we have initiated the promotion of the “Business Club Insurance Package’’ through the DFCC sales channel, which is actively engaged in asset and liability sales and daily cash collections within their respective domains. Specifically, designated operatives have been entrusted with promoting this package to SMEs and business clientele.

The Business Club Insurance Package encompasses a comprehensive array of product covers tailored to address various risks small business owners and SME customers encounter. These covers include Fire Insurance, Personal Accident Benefits, Legal Liability, Workmen’s Compensation Insurance, Burglary, Money in Transit, Breaking of Glass, Signboard Damage, Fidelity Guarantee, and Surgical and Hospitalisation benefits. Customers have the flexibility to select from among these covers according to their specific needs, whether it be fire protection, basic coverage, personal accident benefits, etc. All policies are consolidated into a single, integrated package, which is promoted through the Bank’s designated insurance broker staff and its business development personnel.

Furthermore, we offer the Solar Power System Cover to MSME and SME customers for their rooftop solar power installations, thus enhancing our suite of general insurance offerings.

To address the requirements of our credit card customers, we have introduced “Anantaya,” which provides resettlement cover for credit card usage up to an allocated limit of LKR 1 Mn. In the unfortunate event of a customer’s demise or disability, their outstanding credit card balance will be settled to mitigate any financial burden on their dependents. Moreover, customers who opt for life insurance policies with a duration of 15 years or more and meet a specified value threshold are eligible for an annual surgical cover, which can be utilised to offset hospitalisation and surgical expenses.

Expanding on this concept, we now offer international cover for high net-worth individuals, particularly our Pinnacle customers, through short-term USD policies valid internationally for up to one year. Additionally, we are exploring options for customers to spread their insurance premium payments over 12 months instead of a lump-sum payment, potentially easing their cash-flow constraints. This instalment payment option is available through our credit card platform for select customer segments and specific products.

Changes in the Operating Environment

The adverse operating environment of the previous years has shown a marked improvement as people increasingly seek out life insurance products. This has resulted in an increase of 11% in premiums earned during Q1 of 2023, compared to the same period during the previous year. These financial figures are LKR 273 Mn in Q1 of 2022, which has increased to LKR 303 Mn in 2023, with a strong possibility of further increases over time.

When interest rates peaked, the banking sector slowed the lending portfolio growth, mainly due to the lack of customer demand. With the reduced interest regime, banks have shown renewed interest in securing quality lending, such as leasing products. General insurance has also demonstrated a considerable increase, especially after Q3 of the current year.

Converting Customers through Cross-selling

We have instituted initiatives to encourage our staff to engage in cross-selling strategies to enhance revenue streams. For example, the Bank’s leasing customers may be encouraged to consider acquiring a motor insurance policy and personal accident benefit cover, effectively constituting the cross-selling of insurance products to banking clientele. Similarly, we can advocate adopting “Anantaya,” a short-term insurance offering, among our credit card customers. Furthermore, we actively cross-sell fire or burglary insurance to customers availing housing loans and target importers and exporters as prime prospects for marine insurance offerings. We endeavour to transition bank customers into insurance clients through these approaches, broadening our customer base and revenue channels.

Customer Engagement Unit

This web-based initiative provides dedicated web pages for each product and service offering. These pages are equipped with an inquiry box where customers can submit their questions or concerns related to the featured product or service. These inquiries are seamlessly directed through our Lead Management System (LMS) to the appropriate business units or branches, ensuring prompt attention to customer queries or issues. Additionally, the system incorporates a follow-up mechanism to verify the resolution or response to each inquiry. In the case of business or overseas queries regarding our products, such as the Golden Paradise Visa option or fixed deposits in foreign currency, our competent personnel will address matters promptly and efficiently.

Outlook for 2024 and Beyond

Due to notable enhancements in the overall business climate and the stabilisation of interest rates, there has been a noticeable uptick in business activity nationwide, including heightened borrowing for investment purposes, with indications suggesting a sustained momentum in the foreseeable future. Anticipated is an influx of concessional funding from the Ministry of Finance and various bilateral lenders, notably the Asian Development Bank (ADB) and the Japanese International Cooperation Agency (JICA), in the near term. Additionally, there are expectations for expansion in our general insurance portfolio, particularly in motor, non-motor, and Marine insurance linked to trade activity, bolstering our Marine Insurance portfolio through trade finance initiatives.

Aligned with the augmented general insurance and business activities, our strategic focus will extend to life insurance products tailored to the SME customer base and personal loan clientele in the upcoming year. This strategic shift holds the potential to fortify our life insurance offerings and cultivate a promising trajectory for the latter part of the coming year and beyond.

Performance in 2023

The year under review was highly challenging for the economy, the Bank, and especially for Corporate Banking. 2022 was a turbulent one, with the country reneging on its foreign debt, soaring inflation, rising interest rates, shortfalls in liquidity, and steep increases in taxation. These factors resulted in the Corporate Banking Department providing for significant impairment charges during the period under review.

Despite this, revenues increased due to the prevailing high-interest rates and exceeded budgets. As a result, Net Interest Income (NII) and Fee Income increased significantly during the year under review.

Nevertheless, with many industries significantly impacted and some, such as construction, virtually coming to a standstill, Corporate Banking had to provide substantially for impairments, dampening profitability and consequently ending the year with a marginal loss.

On a positive note, the Payments and Cash Management proposition and the electronic banking platform iConnect was voted Market Leader for the 3rd consecutive year by Euromoney Magazine, underlying market dominance and setting a benchmark in the industry.

Outlook for 2024

Although the macro environment is expected to be challenging, Corporate Banking plans to aggressively grow its asset book by focusing on quality lending opportunities and leading names by increasing wallet share. Corporate Banking aims to achieve a LKR 200 Bn asset book mainly in trade finance and working capital facilities with supply chain financing supplementing this. Corporate Banking will also look at well-placed overseas lending opportunities in line with the Bank’s risk appetite. Project Lending will continue to be a part of the focus since the Bank has its roots in development banking by having a dedicated team looking at opportunities, especially in the sustainability and renewable energy segments. CASA growth, maintaining operating accounts of Corporate customers and Fee Income are also priority areas for Corporate Banking in 2024.

While focusing on growth, the Bank and Corporate Banking intend to intensify recovery and rehabilitation efforts to minimise new impairments and reverse impairments taken in the past. These have a direct impact on the profit of the Bank and on Corporate Banking. To this end, Corporate Banking is setting up a dedicated Recoveries Unit to rehabilitate, restructure and resuscitate distressed companies in the portfolio.

The business environment during the year under review was challenging due to significant contractions following the economic crisis in 2022. High interest rates and inflation, coupled with higher taxation, brought about a substantial contraction of credit during the first part of the financial year. Turning adversity into an advantage, the Bank significantly increased its exposure in government securities over the first half of the year, locking in higher returns and expecting a downward revision of rates towards the second half of the year. Further, we were actively engaged in secondary market transactions through interbank, Institutional and retail clients. Treasury made significant Net Interest Income and Capital gains through its Government securities portfolio, thereby increasing our contribution towards the Bank’s bottom line. This year saw the emergence of DFCC bank as a formidable market player actively participating in the government securities market as a leading liquidity provider across the yield curve.

During the year, the Treasury implemented a robust and client-centric relationship management framework through a dedicated Treasury client relationship team with renewed success while delivering a record performance on foreign exchange income. A lucrative collection of new relationships was added in a highly rate competitive environment, providing much-needed liquidity to the power and energy, pharmaceutical and essential commodities sectors, enabling the Bank to be a key player in the domestic foreign exchange market.

This year also saw the introduction of the Fund Transfer Price (FTP) mechanism, which has enabled the Bank’s business units to identify their efficiencies and inefficiencies and have a more accurate assessment and quantification of their profits. FTP is a global best practice standard, which also serves as a motivational tool for individual business units, as it gives them a precise idea of their current and future profitability, thereby enabling and empowering the business units to make informed decisions with regard to asset and liability pricing. With the implementation of the same, the Bank has implemented a centralised approach to managing interest rate risk, with the treasury department taking the lead. This centralised management involves strategies such as hedging, gap management and diversification to mitigate the Bank’s exposure to fluctuations in interest rates.

Operating Environment

Central Bank Policy rates, which were in the 16% – 17% range, plummeted over the year before settling in the 9% to 10% range towards the end of the year. While the lack of credit expansion due to high-interest rates combined with negative GDP growth and subdued economic activity was disadvantageous for the banks in carrying out regular lending activities, it was offset by opportunities in treasury operations and exceptionally high government security yields. The first half of the year was challenging, with uncertainties on Domestic Debt Optimisation (DDO) and relatively volatile exchange rate regimes. However, such uncertainties faded with the DDO’s conclusion without affecting the banking sector’s holding.

During the first half of the year, the exchange rate stabilised, and the Sri Lankan Rupee appreciated, contibuting to improved liquidity driven by worker remittances and tourism income growth. Improved trade balance compared to the year 2022, along with pledged IMF disbursements and loans from the World Bank and ADB, further strengthened the foreign currency liquidity position of the Country, thereby strengthening the local currency.

Long-term Funding

Despite continuous engagement with the Bank’s traditional funding sources, the Country rating downgrade was a detrimental factor in securing funding within the financial year.

Moreover, additional funding requirements did not arise due to low credit growth in the foreign and local currency lending portfolios during the period.

Liquidity Position

During the period under review, the Bank maintained a Liquid Asset Ratio (LAR) well above 30%, and the Liquidity Coverage Ratio (LCR) was also maintained well ahead of the regulatory requirements. Investment of funds raised through deposits in government securities due to private sector credit contraction created higher liquidity positions across the banking industry.

Regulatory Changes

Foreign exchange controls in place during previous years were systematically relaxed and removed. Restrictions on transferring dividends and several types of outward payments were also relaxed to stabilise the system. Certain outward investments from individuals and banks, previously controlled, have now been permitted within given limits.

This period also relaxed rules on forward contracts for importers and exporters, stabilising the prices of imported commodities. The overall foreign currency liquidity position has also improved due to higher inflows from the tourism sector and worker remittances.

Introduction of the new CBSL Act during the year has significantly enhanced the autonomy and accountability of the governing authority. This will ensure price stability of the Country as the new act sets an inflation target for the CBSL.

Challenges During 2023

“Local Currency Long Term Issuer Default Rating” is currently at CCC – (Fitch Ratings). Since country and currency ratings are still under pressure, our capacity to raise foreign investments is limited. Furthermore, macroeconomic uncertainty caused foreign investors to be concerned about investing in Sri Lanka.

Facilitating international Trade transactions was challenging during 2022 and the first half of 2023 due to the difficulties in obtaining foreign bank confirmations for trade facilities.

Debt restructuring was another major challenge faced by the banking industry throughout the first half of the year. However, the domestic debt restructuring was completed without directly impacting the banking sector, which was a positive development.

The challenge of restructuring foreign currency debt remains, with hopes that it will be resolved by the first half of 2024. Until the process is concluded, we must continue navigating uncertainties and potential impacts on our financial health and operations. Another serious industry issue is the continued “brain drain”, where experienced personnel are leaving the country for greener pastures overseas. Replacing suitable candidates with the required expertise is a massive challenge to the banking sector and even more so at the Treasury, where the skills are in high demand globally.

Future Outlook

Improvement in consumer demand is one of the key areas where banks can benefit, but high interest rates, high inflation and the current taxation structure are hindering this. We are unable to foresee consumer demand picking up unless the Government also plans on significant salary hikes, which could spur demand. Nevertheless, we are optimistic about the upcoming year. Economic Reform programmes implemented by authorities have yielded the first signs of recovery. Real GDP recorded growth of 1.6% (YoY) in the third quarter of 2023 – the first expansion in six consecutive quarters. Shortages of essentials have eased, and inflation remains contained. Furthermore, gross international reserves increased by USD 2.5 Bn to USD 4.4 Bn during 2023. Challenges remain in ensuring that these improvements translate into improved living conditions.

However, once the Treasury Bills, which are nearing maturity, are paid for, it will reduce the Government’s recurrent expenditure on debt servicing. This, in turn, may enable the Government to focus on meeting the urgent needs of the people while infrastructure development will be put on hold for a while.

Under the IMF programme, Sri Lanka has committed to reforms, including restructuring loss-making state-owned enterprises, reducing budget deficits, and improving governance. The Government has committed to amending VAT policies to increase tax revenue. Lowering disposable income due to the high tax regime and higher cost of living may dampen consumption in the coming year. These policy measures will need to be accompanied by strengthening tax administration to make reforms more sustainable and to build confidence among Sri Lanka’s creditors to regain debt sustainability and their support. In November 2023, the official creditor committee and Sri Lanka agreed on debt restructuring in principle. Sri Lanka has also agreed with the Export-Import Bank of China to cover USD 4.2 Bn of its outstanding debt. This covers a significant portion of the existing external debt. In addition, there are ongoing negotiations for a debt restructuring deal with commercial creditors of its defaulted US Dollar bonds.

Furthermore, Sri Lanka expects more foreign currency inflows from ADB and World Bank and the third tranche of the IMF program in 2024.

The envisaged “haircut” for foreign debt restructuring will save foreign currency for the country, and the debt servicing will not start immediately, which is a positive factor. Furthermore, we anticipate the tourism industry will continue to grow while inward remittances stabilise. We expect the exchange rates to hold at current levels in 2024.

Overall, it is likely that economic conditions will improve in 2024. In addition, we look forward to integrating digital solutions into our services to enhance accessibility and convenience for our customers.

The Investment Banking unit traditionally engages with corporates, local and foreign institutions, and governments to continue healthy business relationships and bring funding and new business to the Bank. The Unit also oversees capital raising for the Bank, while underwriting in equity and debt is also part of its mandate. Given the limitations on the scope of our functions within the ambit of a bank, we are looking at a different business model this year, which would help us to expand our activities into new business lines.

In addition to the margin trading license and underwriting license, which we currently have, we plan to set up Custodian Banking services.

We also successfully launched a debenture issue during the 1st week of January 2024 raising LKR 8 Bn, which will help maintain the total capital ratio well above the CBSL regulatory requirement and help us fund the balance sheet expansion planned for the year 2024.

Performance

Considering the growth of the All-Share Price Index (ASPI) by 25.5% and the S&P SL20 by about 16.4%, our Unit’s performance has not been exceptional. However, there is considerable scope for improving our performance in 2024.

The Investment Banking unit handles two portfolios: the available-for-sale and trading portfolios. The available-for-sale portfolio grew by about 7%, whereas our trading portfolio showed a dip of about 16%. Though this is an improved position compared to 2022, we were undoubtedly lagging behind the market performance. The main reason for this less-than-impressive performance is the lack of specialised focus and the scarcity of resources to expand this business.

Performance in the Margin Trading Business

The margin trading business has been lacklustre due to the high interest rates that prevailed from the beginning of the year. This also resulted in lack of appetite for margin trading from borrowers; however, following interest rate reductions in June and July by the CBSL and a drop in the market rates, there was renewed appetite from existing borrowers as well as new requests coming in. This resulted in a slight change in the environment as of Q3 and Q4 of the year.

Outlook for 2024

We believe that the low-interest rates will help the equity market, in addition to the economic recovery and other positive indicators such as the finalisation of external debt restructuring. Improved economic activity will help enhance the banking sector’s performance. The prevailing low-interest rate scenario will also help some highly geared companies to perform well, with improvements in the price of their stocks. This will help with higher equity investments and margin trading business, along with more players entering the margin trading business.

The market expected that the ASPI would rise as high as about 12,000 points, but unfortunately, we saw that it dropped to 10,500 levels. However, the expectation for the year 2024 is that the ASPI will hit 14,000-15,000 points.

During the coming year, we are looking at a very optimistic scenario compared to 2023, but the recovery will be very gradual, as consumer demand will not pick up immediately, given the low disposable income of most salaried employees. The cost of living has risen to a level where the current high prices will remain permanent.

From the Government’s standpoint, once external debt restructuring is finalised and IMF support is assured, there will be overall economic stability despite some challenges arising due to the upcoming elections. However, Sri Lanka can look forward to a positive outlook for the next three years due to improved revenue coming from tourism, inward remittances, exports and related activities. We feel that the Country will see vastly improved economic activities only around 2025 when the Government can commence more significant investment in infrastructure projects, which would be a key determinant of economic recovery.

We are relentlessly focused on growing the volume of trade business and the commission income derived therein, from the branches and corporate banking units. Our unit plays a central role, which includes coordinating with the regional offices and branches, collaborating with external stakeholders, providing required central support for trade business growth and hosting the monthly trade review meeting with the presence of the CEO and all the relevant business heads. Further, we work closely with the 46 Trade Champions appointed from selected branches with trade potential. We conduct monthly meetings with them to review performance, check the pipeline for upcoming facilities and discuss other relevant information. We also conduct regular training on key areas that support promoting trade business, increasing volumes, and acquiring new clients. Furthermore, trade-related reports are shared across the Branch network to identify customers, transaction volumes and reasons for reducing business volumes with DFCC and thereby to take corrective action. Based on economic conditions, customers who belong to specific segments, such as those dealing in Indian Rupees, are visited personally and relationships strengthened in order to improve their trade volumes with DFCC Bank.

Our core banking team and the finance team extract data from branches and business units, which helps us generate reports at a granular level, such as the income earned by the branches, the region, the individual businesses, as well as segment-based analyses of sectors such as apparel, cinnamon, trading, etc. We use these records to carry out comparative studies between different years and advise branches on the potential of particular segments, clients or industries.

Reports on the performance of each branch, trade limits, and utilisation of facilities by branches and business units are shared with each region and the Corporate Banking Unit. New campaigns targeted at drawing in new trade clients are carried out centrally, in addition to customer visits to build new relationships.

Challenging Operating Environment

Throughout 2023, import restrictions were enforced, gradually easing from February onwards, albeit certain items remained subject to restrictions. Reduced consumer disposable income and increased taxes contributed to diminished demand, prompting numerous businesses to cease operations. Consequently, despite the relaxation of many import restrictions, the demand for imported goods has remained subdued.

In light of these challenging economic circumstances, trade customers have expressed concerns regarding fees, rates, and commissions, prompting us to adjust our charges to maintain market competitiveness. On the export front, constraints on raw materials have adversely affected manufacturing, garments, and apparel industries, exacerbating existing challenges stemming from the post-pandemic landscape and escalating labour costs. Consequently, several factories have been compelled to close, resulting in a significant decline in export earnings.

Forging Relationships with Key Partners

We also work closely with the chambers of commerce and trade bodies, enter partnerships, and offer sponsorships to increase visibility. Forming tie-ups with external stakeholders such as the National Chamber of Commerce and the Ceylon Chamber of Commerce, sponsoring some of their events, and entering into memoranda of understanding are vital from a business perspective. These partnerships have improved the image of DFCC, along with awareness among key industry players and SMEs about our offerings, such as our specialised refinance loan schemes. We also aim to share our details on clients’ websites and industry publications to make further inroads among respective industries.

We are also building relations with stakeholders in business banking through our Branch Managers, Regional Managers, Trade Champions, and Relationship Managers, specifically focusing on trade income. We conduct regular analyses of competitors and their tariffs and identify new market opportunities, such as Government decisions to allow transactions in Indian Rupees or relaxing of certain import items. The Bank has identified new segments like cinnamon, spices, sugars, and other trades for which we customise and structure our facilities. Timely concessions are given for seasonal products to promote and on-board new clients.

Looking Forward

We are strategising to establish DFCC as the primary or preferred Bank for every client we engage with, fostering long-term relationships and loyalty. In addition, we aim to capture the attention of significant clients from competitor banks through our extensive branch network, thereby expanding our trade business and securing a larger market share. This proactive approach ensures the acquisition of new clients while promoting sustained growth.

As the country’s situation stabilises and favourable political and economic conditions prevail, coupled with releasing the second tranche from the IMF, we anticipate a significant upturn in trade activities. Resurgence of confidence among foreign importers and suppliers in Sri Lanka signals promising prospects for further advancements in trade dynamics.

Furthermore, we are keen to collaborate with regional officers of the BOI zones, particularly in areas hosting exporters and importers of raw materials. By renewing our focus in these regions, we aim to capitalise on emerging opportunities and facilitate mutually beneficial partnerships to drive sustainable growth.

Remittances

Despite operating within a challenging environment, we have significantly elevated our Remittance business by expanding our presence through strategic deployments of Business Promotion Officers in key markets such as Israel, Qatar, and Dubai. Concurrently, we have forged partnerships with reputable and prominent exchange companies across various corridors. In addition to our established foothold, we have ventured into new territories, including Italy, Cyprus, Australia, Hong Kong, and the UK.

The results of these endeavours have been remarkable, with our remittance volumes experiencing a substantial surge. For instance, our Gross Remittance Inflows which stood at USD 37 Mn in the previous fiscal year, have soared to over USD 120 Mn by early October of the current year. Ongoing negotiations with numerous exchange houses is set to bolster our market position.

Efforts to curtail remittances through illegal channels have yielded notable success, attributable to proactive initiatives by the government, comprehensive promotional activities by financial institutions, and targeted awareness campaigns on social media platforms and print media. Moreover, the Central Bank of Sri Lanka’s (CBSL) introduction of financial incentives for legal remittances has served as a significant catalyst in augmenting the volume of remittances through official channels.

Lanka Money Transfer (LMT) stands as the proprietary remittance platform of DFCC, facilitating Sri Lankan residents abroad to transfer funds to Sri Lanka seamlessly. LMT extends its services across 12 countries, including Israel, Oman, Qatar, the UAE, South Korea, Hong Kong, Italy, Singapore, Australia, New Zealand, and Japan.

The LMT system is intricately linked to our Application Protocol (API), establishing real-time transfer capabilities to accounts with 10 partner banks. Additionally, collaborative efforts with Amana Bank and Citizen’s Development Bank have been undertaken to promote awareness among potential migrant workers. This concerted initiative ensures that customers can securely and conveniently initiate their remittances.

Recipient locations span 1,300 bank branches nationwide, affiliated with 10 partner banks, while remittance transactions can be initiated from over 500 locations across overseas territories. Withdrawal services are facilitated through more than 4,100 ATMs linked to LankaPay.

LMT has established partnerships with approximately 25 exchange houses operating in the countries under its purview. Notable partners include Worldcom Finance Ltd. (Israel), S T B Union (Israel), Unigiros Ltd (Israel), Global Money Exchange Co. (Oman), Al Zaman Exchange Wll (Qatar), Islamic Exchange Co. Wll (Qatar), City Exchange Co. Wll (Qatar), Alansari Exchange Llc (UAE), Lulu International Exchange Llc (UAE), Sharaf Exchange Llc (UAE), Worldwide Cash Express (UAE), Dar Exchange (UAE), Kookmin Bank (South Korea), A T Services Ltd (Hong Kong), Necmoney Transfer Ltd (Italy), and Hanshan Money Exchange (Singapore).

In the fiscal year 2023, LMT recorded remittances totalling USD 120 Mn, comprising over 50,000 transactions. This represents a substantial increase of 300% and 150%, respectively, compared to the previous year.

Throughout the year, a concerted effort was made to encourage Sri Lankans abroad to utilize official remittance channels, dissuading reliance on informal channels, particularly amidst financial challenges. Attractive incentives, including loan schemes, bolstered this initiative.

DFCC’s provision of a reliable channel for Sri Lankans overseas to remit funds has significantly contributed to the Nation’s economy, particularly during times of heightened need.

Forming New Alliances

This year, our emphasis has been on revitalising and fortifying our alliances with existing partners and exchange houses abroad. Collaborating with the Sri Lanka Bureau of Foreign Employment (SLBFE) in Sri Lanka has been a pivotal step in this direction. As part of this partnership, we have introduced a financial literacy booklet disseminated through SLBFE’s Regional Offices across various countries and through our Business Promotion Officers (BPOs) stationed overseas.

Introducing a pre-departure loan facility, designed to provide financial assistance to workers embarking on overseas employment upon confirmation of their departure, has been another notable initiative. In conjunction with recruitment agencies, we have conducted partnership programs to impart financial discipline to departing workers and emphasise the importance of remitting funds through legal channels.

Our strategic focus remains on implementing fresh promotional campaigns with our international counterparts to enhance our market penetration. Concessional rates and incentives will incentivise individuals to utilise official remittance channels. Additionally, leveraging Sri Lankan cultural events such as Avurudu, Independence Day, and professional gatherings presents an opportunity to raise awareness about the myriad benefits of utilising official remittance channels.

Challenges to Overcome

It is imperative to acknowledge the existing challenges impeding remittance volume growth, including linguistic barriers across diverse markets and our late entry into the field. Compared to larger remittance markets like India, Bangladesh, Pakistan, and the Philippines, Sri Lanka’s relatively smaller market size tends to receive less attention from exchange houses. Additionally, the comparatively limited branch network of DFCC in Sri Lanka diminishes our appeal as a partner for exchange houses in these markets.

Moreover, sourcing capable and willing personnel for deployment overseas remains a persistent hurdle. Despite the blue-collar segment accounting for approximately 90% of total transactions, our focus should prioritise the white-collar segment, which tends to engage in higher-volume transactions and is more inclined to retain earnings in foreign currency. Addressing these challenges will be instrumental in enhancing our remittance business.

Looking Forward

Our primary objective centres on further expanding our presence in overseas markets, and we have already initiated negotiations in countries such as South Korea, Japan, Bahrain, Oman, Malaysia, and Kuwait. Additionally, a concerted effort will be made to promote the pre-departure account, with targeted promotional activities slated for specific regions within the Dubai and Saudi Arabian markets.

Our strategy includes a focused campaign to raise awareness of our competitive interest rates, coupled with incentives to encourage greater engagement from prospective workers before their departure. Furthermore, we are actively promoting our loan products, designed to offer greater flexibility, thereby facilitating the routing of earnings through official channels to DFCC.

As our market share continues to expand, there is a pressing need for additional staff to be deployed overseas, aligning with our ambitious growth trajectory.

International Trade and Remittances

The International Trade and Remittances business encountered challenges during the early part of the year, influenced by a combination of interrelated factors linked to the Nation’s fragile foreign currency position. This scenario was a continuation of the repercussions stemming from the financial crisis of 2022. Notably, the outlook for International Trade was tempered by prevailing import restrictions, particularly for vehicles. Concurrently, the Remittance business faced uncertainties associated with fluctuating exchange rates during this period.

In response to these uncertainties, some Sri Lankans employed overseas opted to route their funds through informal channels offering more favourable rates than conventional banking channels. However, the landscape evolved significantly as the year progressed, marked by increased availability of foreign currency in the market and notable improvements in official foreign currency exchange rates.

Improved Business Environment

At present, most import restrictions, except for those on vehicles, have been lifted. Banks have adequate access to foreign currency, essential to facilitate imports or other international transactions that clients bring in. This has led to an improvement in foreign trade, which has resulted in an improvement in acceptance of the Letters of Credit (LCs) issued by local banks to overseas banks and suppliers. However, a significant hindrance to changing the acceptability of LCs issued by local banks is Sri Lanka’s lingering perception regarding default on foreign currency obligations. This situation is likely to be reversed only if sovereign ratings are restored to acceptable levels by rating agencies. If the sovereign rate is improved, Letters of Credit will be freely accepted in overseas markets, resulting in a higher volume of import transactions using LCs, allowing Sri Lankan importers to reduce providing funds in advance to their suppliers.

Stabilisation of the official foreign currency rate, too, has led to a tremendous increase in the remittance of foreign currency through legal channels, as our expatriate workers are using remittance service providers and banks as safer and more convenient options to illegal operations.

Changes in the Imports and Exports Scenario

Despite the easing of import restrictions and availability of foreign currency, imports have yet to show a considerable increase due to the high cost of living and high taxation, which has compelled people to focus on essentials. Due to the lack of discretionary income, they cannot spend on luxuries, which usually accounts for a proportion of imports. Further, due to frequent fluctuations in exchange rates during the first half of 2023, importers were unable to correctly predict movements in the value of foreign currency rates, resulting in them being more cautious when ordering goods from overseas.

The much-needed export drive of the country has shown limited success due to various factors. Firstly, economies worldwide, especially in the European Union, are facing a recession, which has dampened the enthusiasm for imports across several categories. Exports of Sri Lankan tea have been adversely impacted by the war in Ukraine, which has slowed down the economy of Russia, which is among our top buyers. Among our largest buyers, tea exports to the Middle-Eastern region could be impacted if the conflict in Palestine spirals out of control beyond the current area.

Creating a regulatory environment by the government that is supportive of and conducive to exports could go a long way in improving the Country’s export performance. On the other hand, the banking industry has reduced the rates and commissions charged to exporters, thereby giving a much-needed boost to the sector.

Outlook for 2024

An essential factor to be considered is the series of elections to take place in 2024. Policies implemented will be key to building up the economy, improving exchange rates and sovereign ratings, and ushering in improved investments in crucial sectors. The climate of uncertainty that prevails until elections are held is a dampening factor which could inhibit business growth.

The current war in Ukraine and the Middle-Eastern crisis may hurt the price of oil, which could have a ripple effect across the global economy, which in turn may negatively impact Sri Lanka’s economic prospects.

Importers and exporters are impacted due to the hesitation displayed by foreign traders in dealing with their Sri Lankan counterparts due to our default status. Our sovereign rating will be crucial to restoring the confidence of foreign buyers and sellers dealing with our importers and exporters. In addition to achieving economic growth and stable exchange rates, restoring our sovereign ratings by international rating agencies to acceptable levels is imperative for Sri Lanka to achieve a level playing field in the international markets. Once the Government commences settling its international obligations, it will enhance the Country’s image, paving the way for foreign direct investments to start flowing in again, which should boost the economy significantly.

Performance in 2023

DFCC, as a bank, has traditionally been highly supportive of the imports and exports business. The Bank has always meticulously analysed market conditions, providing clients with comprehensive services, including competitive exchange rates, interest rates and advisory services. We have an exceptional team of professionals with cross-functional capabilities who have supported and guided clients, informing them about important factors to consider when completing transactions and other related issues.

The team is committed and equipped to offer customised trade solutions according to ever-changing business environment and help clients take their businesses to the international arena beyond market boundaries while adhering to the changing nature of local regulatory requirements.