Managing Cost gives more Benefits to Customers – DFCC Vardhana CEO
August 23, 2012
Mr. Lakshman Silva, Chief Executive Officer of DFCC Vardhana Bank
2012 a more challenging year than 2011
DFCC Vardhana Bank Chief Executive Officer Lakshman Silva, who is also an Executive Vice President of DFCC Bank was previously the Vice President -Corporate Banking Division of the DFCC Bank. He has also served as Manager/Vice President of the Colombo Office, Kurunegala and Matara branches and counts over 22 years’ experience in development and commercial banking. In an exclusive interview with the Ceylon FT he discusses about the profitability of the bank during the financial year 2011/2012. Here are the excerpts of the Interview
Q: What can you say about the current performance of the DFCC Vardhana Bank?
A: The year 2011/2012 has been a profitable year for the bank. The DFCC Vardhana recorded growth with regard to liabilities, assets and profitability and all the other key performance indicators (KPIs) during the period. Vardhana Bank which is a separate entity recorded a very satisfactory result in 2011/2012 compared to other years. Having stepped into the 10th year; we have recorded our best Performance in 2011 /2012.
Q: According to your thinking what factors contributed to the profit growth of 37% for the financial year 2011/12?
A: There are many reasons for that. Firstly, in the last seven years we were concentrating on consolidating our position, which was expanding to serve our customers better. We put in a lot of effort to bring in new technology. All our operations are technology-driven; we have the best technology — seamless integration. All branches are integrated into one. We operate online including reporting and transaction processing; everything is seamlessly done on a timely manner. We spent on developing the online process which is operational in the last seven years. From the start we realized the benefits of using technology in the banking sector. In that respect in 2011, we were very successful. The second reason for our success in 2011/2012 is that we slightly diversified our focus into acquiring corporate customers into our bank. Now we concentrate more on corporate customers.
As a result our export and import business has improved last year. All the above mentioned reasons helped to increase our profits. The other key factor was that the bank, within the last nine years, has been rated international AA- by Fitch Ratings. That’s a significant achievement by DFCC Vardhana which very few banks currently hold. As a result we gained the confidence of customers. Now our customers understand the importance of the ratings of banks. We were able to grow our liability rate significantly. All these factors helped us to record substantial growth in 2011/2012. Coming to 1H of 2012, we have done even better than last year, but not to the extent that we would like to do, as we had to comply with the Central Bank’s credit ceiling. We have not expanded credit very much in the last two quarters. As a result, we have not been able to get what we wanted; but we agree that the country’s requirement comes first, and we have given due priority to that. The first two quarters also have increased our profits, compared to the corresponding period last year, say by about 70% to 80%. We also have increased our income; so all in all we have shown good results so far.
Q: DFCC Group continued to focus on controlling costs — you had announced this recently. How would you define that?
A: Actually it is not about controlling cost; it is what we use as prudential methods of managing costs. The reason is that we would like to give more benefits to the customer. If you look at our liabilities, interest rates paid on fixed deposits, savings accounts, and even junior accounts, we generally pay a higher rate in the market.
In some products we are the highest, for instance the savings account we launched very recently ‘Supreme Wasi’, we pay 10.5% to all our savings accounts holders, if they maintain a minimum balance. If you look at the ‘Vardhana’ junior account, for children, we pay the highest interest rate of 10.5%. We pay a very competitive rate to fixed deposit (FD) holders .We focus on giving the best benefits to our customers. We do not record profits like other banks. Our philosophy is to retain our customers. We don’t pay them the lowest interest rate and make them leave us. As a young bank, we comparatively manage our costs.
Q: Year 2011 was a challenging year for the banking industry both locally and globally. What are your comments on that?
A: 2012 is a more challenging year than 2011 I would say. Comparatively 2011 was a much better year for the entire banking sector. Most of the banks have indicated and recorded satisfactory progress in terms of profitability growth. 2012 is going to be a difficult year. We come across lots of difficulties due to the credit restrictions on expansion, but we have to manage within these restrictions.
Energy and fuel costs and the various other costs are going up. As a result the profitability of the bank and customers will be affected — especially industrial entities and business communities. We noticed a slight increase in interest rates in borrowing. Therefore, our borrowing costs are high. This is the local scenario. On top of it, we see a drought situation than ever before, it’s much critical and will affect the energy sector and consequently cause a knock on effect. Ultimately, customers will be pressurized more. At the end, all this will affect the Sri Lankan business community. There is a lot of instability internationally, which affects the global and local markets.
The war in Iraq and Afghanistan during the last two years, the Syrian civil strife this year, and other turbulent issues in the Middle East will result in further economic downturn. Some of our exports clients are adversely affected already, due to the problems in the Middle Eastern countries.
Q: What are the toughest challenges faced by DFCC Vardhana bank, under current economic conditions?
A: Established entities could manage these very easily, but these are challenges we have as a young bank, having been set up at a difficult period in this country. Our bank was set up in 2003 —during the time of the war. It was not at all a good year to start a bank. In fact it was a requirement of our parent, DFCC Bank,since, it had not been able to provide the required commercial banking facilities to its own customers as a long-standing development bank. We started the bank at a very difficult juncture. The first five years were very challenging, because of the civil war and the resultant economic calamities in the country. The economy was not growing; people were not investing. As a result, starting a small bank was difficult.
At the time we started the bank, there were many regulations relating to banking and good governance which we had to implement. We had only one good year to look back at — i.e. year 2011— as a very prospective year; but again there were international and local scenarios, that made banking business difficult. In a competitive environment, competing with large established banks, was not an easy task.
Q: ‘Risk Management’ is one of the major factors a bank should mainly focus on. DFCC Bank won the award for ‘Best in Risk Management’ at the Fifth Asset and Liability Management (ALM) Competition in the Netherlands recently. How do you evaluate the achievement? How important is risk management for a bank?
A: DFCC Group won the award, under the Asset and Liability category which is a great achievement. Being a Sri Lankan bank with a small economic background, our operations are very small and the banking sector is also competitive which means we have to compete with the banks in other developing countries. It is significantly important to show the world who we are.
Looking at risk management, we are better than most of the other developed countries. We have seen clear evidence of what has happened to the so-called banking sector in developed countries. There are a many calamities occurring. I doubt whether ‘best practices’ are applied. Our risk philosophy is clearly translated into practice. It is very unlikely that the banks/financial institutions can face this kind of problems which are of international magnitude. May be the reason is that they are too large.
In that aspect, of course most of the banks in Sri Lanka are following these risk control mechanisms. As a group, DFCC has been maintaining the guidelines relating to risk management very well. We went into an international competition and we won an award from the Association of Development Banking of Asia Pacific, which has given a clear signal to many other institutions in Sri Lanka. International best practices would always help the progress of a bank.
Central Bank of Sri Lanka has imposed good governance and risk management controls. There are separate dedicated integrated risk management committees, board sub committees and management committees. All these practices were not available in Sri Lanka a few years back. Risk management was a responsibility of the CEO, or the Board of Directors. There were no well-structured processes then. Currently, we have a dedicated integrated risk management team and departments. There are different management groups.
The above-mentioned teams regularly monitor the banks and financial institutions. They look at various possible options where needed and devise proactive risk control mechanisms. The Central Bank has also introduced new mechanisms where banks have to report risk indicators on a regular basis which is monitored by the Central Bank. We, as a financial entity, largely depend on our customers. Sixty per cent to seventy per cent of our funds are customers’ liabilities. We are responsible to ensure that the deposits and funds our customers provide are safely returned to them.
Internal risk control mechanisms should be transparent. Previously, these things were not seen by the general public. Now internal controls are required and should be disclosed in annual reports and so forth. The public is aware of what types of internal controls and risk control mechanisms are adopted by various banks and financial institutes. If the customers are educated enough, they could see as to what risk control mechanisms have been adopted and by which institutions, through perusing annual reports. They can look at ratings given by rating institutions. I advise customers to look carefully into those matters, before they start dealing with a financial institution. They should actually look at stabilized, established and well-governed organizations to deal with.
Q: Can you tell us more about the product portfolio of the bank?
A: If you take our lending portfolio, housing loans, personal financial loans and leasing are provided under one roof. We have educational loan schemes for parents to fund their children’s studies, young professionals to advance their careers and enhance their secondary education, housing loans and special loan schemes. All those are provided through our branch network.
In our liability side, we provide the best possible saving products, from the child up to the adult. There are different sets of accounts for minors to adults saving accounts and ‘Garu Saru’ for senior citizens.
All those are given different types of benefits, depending on the age group and the customer-base. We have treasury products whilst our corporate and foreign currency deposits rates are very high. Another important factor is our current account customers. We are one of the few banks which provide the immediate clearings of cheques, within a day. That is applied across our network.
We have introduced our Vardhana internet banking which has expanded our service. In addition to that, our ATM network is over 600. Our Visa credit cards and Visa debit cards can be used at any Visa-enabled machine and customers can do transactions even abroad.
Q: DFCC and DFCC Vardhana Bank (DVB) continued to expand its operations, especially outside the Western Province. What are your plans for 2013 and beyond?
A: Western Province and Colombo and its suburbs are over-banked. Almost all the banks and financial companies operating in Sri Lanka are present here. As a result we decided to go out and it was our philosophy. That was the first philosophy we had. From the inception we have been locating our banks mostly outside the Western Province. 127 branches are there at the moment. We will open another 10 more branches during the next five months.
We keep expanding but not aggressively like many others. We open branches only where there are opportunities and we are expanding at a very rational rate. We have branches in the North and East. Recently, we opened the Kilinochchi branch. During this year we will open three more branches in the North and East and a few other branches down South as well. We continue to serve the rural areas.
We provide banking facilities through the Sri Lanka postal network for customers who do not have banking facilities in their areas and for people who are unable come to banks. There are 73 such units. We will improve our quality and standards of service. We have a large client base which we want to break into segments and provide dedicated services. We have taken the initiative, and started a new concept ‘priority banking’ under the brand name ‘Prabhoo’. We selected very busy high net worth customers who need personalized services. We have already opened three such units to provide faster and quick services. It will be expanded further.
The second thing is that for premier customers in Colombo we will open a Premier Banking Centre in Colombo, by 2013. In terms of liabilities — we are pricing our liabilities — there is a tendency for the market rates to go up, and we will be the first to react. We will provide the best possible liabilities. In addition, we want to consolidate our technology. At the moment we have a product called Vardhana Mbank, which provides door-to-door service to the customer. We run that on a test basis; we want to expand to a point where our sales agent will be at the customer’s doorstep to do the transaction. And that has to be expanded further, to reach people who do not have internet facility. Furthermore, we are in the process of launching several banking solutions through mobiles which will be ready within next few months.