Operating environment

World economy in 2019/2020

According to the World Economic Outlook, global economy growth stood at 2.9%, the lowest growth rate recorded in the last decade. The year saw trade policy uncertainty, geopolitical tensions, and idiosyncratic stress in key emerging market economies affecting global economic output, especially in the manufacturing and trade sectors.

The US, the Euro area, and China the world’s largest economies suffered a marked deceleration of activity in 2019. This will have an impact on the economic prospects in countries around the world.

The trade dispute between China and America that marred 2018 eased during December 2019. Brexit fears also played a huge role during the year, however, the uncertainty surrounding the Brexit eased with United Kingdom declaring that it will leave the EU on 31 January 2020, after which a transition period will set in.

The outbreak of the Covid-19 pandemic across the world in 2020 will have an unprecedented and unforeseeable impact on global growth and economies around the world. The IMF estimated a growth of 3.3% for 2020 before the pandemic, since then these have been drastically revised. Given that the pandemic is ongoing, even at the time of this report, it will have a profound impact on the world as a whole.

Sri Lankan Economy

Sri Lanka’s economic growth has been on a downward trajectory since 2015, and recorded a subdued growth of 2.3% in 2019 compared to 3.3% in 2018, the lowest since 2001. This is mainly attributable to the sluggish economic activities coupled with Easter attacks and subdued performance of the agriculture sector due to adverse weather conditions.

Sri Lanka’s sovereign credit rating was affirmed by major international rating agencies in 2019, despite the downward revision to the outlook for Sri Lanka, reflecting the possible weakening of fiscal position of the economy. Fitch Ratings and S&P Global ratings affirmed Sri Lanka’s rating at “B” in December 2019 while Moody’s Investors Service (Moody’s) maintained its ratings at “B2” in 2019.

Inflation measured by both the Colombo Consumer Price Index (CCPI) and the National Consumer Price Index (NCPI) accelerated to 4.8% and 6.2% respectively in 2019 despite remaining at a mid-single digit level.

The non-banking – financial institutions sector [NBFI]

According to the CBSL Annual Report 2019, the year was challenging to the NBFI sector in Sri Lanka owning to market conditions and socio-political impacts. The Licensed Finance Companies (LFCs) and Specialised Leasing Companies (SLCs) sector showed only a marginal expansion in the asset base while performance of the sector deteriorated with negative credit growth, declining profitability, and increase in NPLs. However, the sector as a whole, maintained capital and liquidity buffers well above the regulatory minimum levels.

CBSL implemented stringent regulatory actions and safeguard measures during 2019, in view of ensuring long term sustainability of the sector while seeking to ensure the safety of depositors. The total asset base of the sector expanded marginally during the year, while credit growth of the sector remained negative in 2019. The investment portfolio recorded a significant increase, due to increased investment in government securities, equities, units and other debt instruments, and real estate amidst limited demand for credit and the cautious approach in lending by the sector. The deterioration in asset quality of the sector was reflected by the increase in NPL ratio in 2019. Meanwhile, the sector recorded a substantial decline in profit after tax, compared to the profit recorded in 2018, mainly due to an increase in non-interest expenses and high loan loss provisions. Signs of stress on profitability were also reflected by the decline in ROA and ROE during the year. The insurance sector expanded moderately during 2019, recording a growth in its assets base. Contractual savings institutions, dominated by the Employees’ Provident Fund (EPF) and the Employees’ Trust Fund (ETF), recorded moderate performance while providing reasonable positive real returns to the membership.

The Impact of Covid-19

The sector was struggling with many challenges and weakening profitability even before the Covid-19 outbreak. Following the diagnosis of COVID-19 patients in Sri Lanka, from mid-March 2020 onwards, the Government implemented several prudent measures to contain the virus. These include “Work from home” for the general public as well as island-wide curfew imposed from 20 March 2020 for all sectors and services except for “essential services.” The curfew restrictions have gradually been lifted in the country. While there was a recovery in the sector in Q1, the pandemic and its resultant financial impacts and restrictions and directives of the Government and the CBSL have severely impacted the bottom line of the sector.

People’s Leasing during the financial year

2019 Q2

The Easter attacks severely impacted the local economy, the NBFI sector, and the Company in terms of business volumes and recoveries. However, we were proactive in facing the crisis as well as offering our customers much needed relief in the form of default reliefs and concessionary periods during this difficult time. Rather than a Company-wide policy to tackle customer grievances, we allowed branches to grant reliefs which included 100% default interest waive-off to clients case by case.

2019 Q3 and Q4

Political instability and changes which included the Presidential Elections as well as tax changes, interest amendments and other monetary policy changes impacted the industry and the Company [see the industry overview above].

2020 Q1

The outbreak of the Covid-19 in the world and in Sri Lanka severely impacted the economy, the NBFI sector, and the Company. The Company had to manage the regulatory impact with regards to moratorium and other guidelines issued by CBSL and FIU. There was a huge impact on operations with decreased business volumes and collection ratios since mid-March 2020 that led to a drop in Company profits.

Our proactive response to Covid-19

Despite the unforeseen challenges, we took proactive measures to face the pandemic in a prudent manner. Critical functions were identified and internal systems were developed which allowed employees to operate during emergency situations. Working from home for critical functions was facilitated by the Management. Further the following measures were taken to manage the crisis:

• Crisis management systems and preparatory measures were established after the Easter attacks, therefore we were able to switch to emergency procedures with ease
• Certain manual processes were systematised within a short time span
• Following the national quarantine guidelines, the sanitary and hygiene requirements were adopted immediately by the Company which facilitated operations when the curfew restrictions were lifted in selected districts.
• In this time of global crisis, our main objective was not to penalise our loyal customers. While taking measures to give financial reliefs, we also facilitated every requirement even with the minimum number of staff.
• The Company greatly benefited from the past investments in state-of-the-art IT infrastructure as well as the strong in-house IT Department.

Our social responsibility during Covid-19

• The health and wellbeing of our stakeholders, which included our valued employees and loyal customers, was our highest priority.
• Most of our customers, especially the SMEs, were severly affected. We realised our responsibility to support them to restore their livelihoods until the end of the crisis.
• We demonstrated our true responsibility supporting these businesses and individuals, by effectively managing the moratorium process to assist those who were affected, in line with the Central Bank regulations.