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People’s Bank’s Gunawardana: “Digitalisation is imperative to survive in the next century”

Interviewed By Emmanuel Daniel

Rasitha Gunawardana, CEO and general manager of People’s Bank, summarises the decade-long process of technologically upgrading the largest state-owned bank in Sri Lanka. He talks about the risks and challenges

• Capital adequacy, profitability, service levels and employee motivation are the lead priorities under the current leadership of Gunawardana
• Early digitalisation of the bank’s processes and channels led the bank to further explore its modernisation journey
• The bank is looking at possibilities of collaborating with telcos, deemed as one of their biggest challengers

Rasitha Gunawardana rose from the ranks to become the chief executive officer and general manager of People’s Bank on 15 April 2019. He joined the bank when he was only 27, at a time when People’s Bank was focused on the rural sector. Through the years, he has gained first-hand experience of the inner workings of the government-run institution, specifically in the following areas: finance, performance management, corporate and commercial credit, treasury operations, credit control and risk management.

At present, Gunawardana has been with the People’s Bank for more than three decades and has witnessed and contributed to its growth. However, he took on the CEO mantle at a time when Sri Lanka was experiencing economic and political setbacks. Despite encountering challenges right from the start of his leadership. Gunawardana is optimistic that the banking industry is likely to bounce back.

In this interview, he shares a brief history of his early years with People’s Bank, talks about their current undertakings, and reveals how digitalisation played an important role in the bank’s rise to prominence.  

Emmanuel Daniel (ED): I'm very pleased to be able to be able to speak today with Mr. Rasitha Gunawardana, the current chief executive and general manager of People's Bank, the largest state-owned bank in Sri Lanka, and perhaps systemically the most important bank in Sri Lanka.

Mr. Gunawardana has been a career official of the bank. Did you always work at People's Bank? And how many years were you at the branch?

Rasitha Gunawardana (RG): I started my career at the age of 27 when I joined the bank as a financial officer, and I had the opportunity to work with a number of good leaders. They ensured that I get my exposure, all round exposure across all important elements of banking. I started off as a credit evaluation officer in branch level and then went on to do various other aspects of bank financing.

I was almost there for about four years, in branches and regional offices. So I was basically responsible for getting all the branch credit proposals and evaluating them for their credit quality and give my views on it. And that really initiated me into bank credit. And after that, I came to the Colombo head office. And I was working in the finance department as a, basically in the budgets and planning section of the finance department. And I got a good view of the entire banking operations when I started working there at the head office. I got a good feeling about the cost structure and the income structure of the bank and how these are interrelated and other important aspects such as previous incomes, and how you how you can manipulate income levels and how you can do your pricing, depending on your risk profiles, risk appetite, all those aspects. I started getting that exposure when I started working at the head office.

ED: Which then takes you from the branch, grassroots level of the business up to the treasury and to the senior management level. Were you involved in transfer pricing? In treasury management?

So you saw the funding base of the business, which is what a state-owned bank, like People's Bank is all about. It's like a cheap cost of funding, which then needs to be redeployed into the economy to lending to small businesses, to development funding and so on. On the lending side, what was the profile of the banks in customer base?

RG: When I started off, about 30 years back, we were basically a bank catering to the rural sector. That was our bread and butter those days. We were there in the city. But our strong points were in the rural sector. Our funding came from the rural sector. And most of our funds were deployed as loans and other facilities in the SME sector. But all the period, we knew that we can entirely depend on the rural sector. So over the last decade, we made a conscious effort to get into the corporate sector and investment banking sectors and the treasury. So we developed. We had a conscious strategy to develop those sectors, the treasury, investment banking and the corporate banking. And I think now it is getting us a lot of dividends, that strategy, because if you take our entire portfolio, I would say 30% is in the rural sector, but about 25%, we have given to SMEs and corporates.

ED: That was a conscious development over the last 10 years, you said? Which means you're adding new products into the business mix. These products, were they driven by a social consideration, a political consideration? Were there forces that were outside the bank, directing the bank, or was it commercial entirely? Were you thinking like a business?

RG: I would say being socially conscious is good business. It's always good business. Because our strength continues to remain with the rural sector. If you take my deposits, about 75% of my deposits come from the rural sector, small ticket deposits. Those are basically CASA, savings accounts and current accounts. So that is our basic strength. Maybe 60% of it comes from the rural sector. But as I mentioned to you earlier, we have always thought that we need to diversify a little bit, we need to go with the currents of the country. The country was developing over the last 10 years at a very fast pace. we saw a lot of opportunities in the cities, in the corporate sector, the big businessman. So we diversified. But one thing I couldn't mention to you is our exposure to retail banking, the personal banking products. That also is another area where we have done well during the last few years. And our portfolio consists of a well-balanced portfolio of rural loans, SMEs, personal loans and corporate loans. I would say it's well balanced. So that's really our motto for the last 10, maybe 15 years.

The road to digitalisation

ED: But there's one element that you haven't described to me yet, which is the investment in infrastructure, more branches, core banking system, distribution network and today, small digital. And the decisions that you needed to make very quickly to support the infrastructure that you needed to keep up with these new businesses that you may have been investing in. So how would you describe the decisions made within the bank in the investment of this infrastructure? And how are you funding them? Because did you at any time have issues in raising capital, raising support. I have this sense that a bank, like People's Bank, because it's owned by the state is constantly under the scrutiny of the government of the day. And on top of that, Sri Lanka was going through tremendous transformation in terms of the political leadership, which is you know, finding its ground in terms of the most stable type of leadership to take it to the next level. So against that background, the decisions that you were making, not just at the product level, but also at the infrastructure level, what was going on, what was your experience and what have you achieved?

RG: At the time I joined the bank, this was completely a manually-driven bank. The entire internal operations were done manually. And there was basically no computerisation. Then in 2004, we started computerising, we bought a core banking system. And we started putting a network together. And once we finished that, it took us about maybe eight to 10 years to complete that entire process. We did not have much experience on a computerised environment. But over the period we learned the advantages, how to mitigate risk. And by the time it was 2015, after 10 years, we were really ready to fly. And that made us look around. It's not a big decision to come to the conclusion that the next step is in digitalising. The market was ripe. If you take mobile penetration in the country, it's 110% at the moment, people owning more than one SIM card. So we thought, okay, let's go this way. And some of the countries, even the Western countries, they were a little reluctant to go in the digitalisation part. But we made sure and we made a conscious decision again that this is the way forward. And I am very proud to say that when in terms of adaptation of technology, we are leaders currently in the market. We did one better than even the private sector banks who were supposed to be more proactive, more actively looking for opportunities. But we went one up on them. And now the entire market has realised the good sense of digitalising the processes, digitalising channels, all the channels. And so it's a journey. And I feel we are vindicated by the results.

ED: So what are the results? Give me some numbers, give me some metrics, give me some ratios in terms of how do you think you've been achieving the benefits or dividend of digitisation, customer profitability, customer product ratios, reach, onboarding. What are the numbers on top of your head that justifies what you just said?

RG: We thought of getting into six more deals, some of them are digitising the internal processes, part of them is digitising the internal processes. The other thing is the front end where the customer interacts with the bank. So what we did was we introduced corporate internet banking, corporate mobile banking and handheld mobile app, and the app has been very successful. And we are proud to say that adaptation of our app is number one in the market. Some of the private competitors are catching up. But we have still maintained a distance, because we were early adopters, we got into this handheld mobile app that has been very successful. And then the corporate internet banking and corporate mobile banking, that is for the corporates, so that app will sit on the corporates’ desktop and they can do all their transactions with the bank at their desktop. So that's a little slow because even for the corporates of the country, it's a sea change in culture. They need to change the way they are uprooting; they get their internal things done. And so it's a journey, it's an educated journey. So we are at the forefront there again. We are educating our customers to ensure that they see the advantages of going through these digital channels.

ED: How much of your infrastructure capability is inhouse? And how much of it is outsourced? How big is your IT team, for example? And how fast have you been able to respond to some of these challenges or these opportunities in these changes as they take place? Would you say that your infrastructure team is future ready? Meaning that they can respond very quickly? Or is it a kind of a collaboration that you have with external suppliers or people who help you to scale very quickly?

RG: If I talk about my internal staff, IT is a sector that is fast developing. The technology is changing, various vendors are bringing in different technologies. We really need a multi-talented IT team. So what we did was, we ensured that we have a good mix of internal people and externally recruited, contracted staff. They were given the task of achieving the bank's objective. The person who is heading the bank’s initiatives is an IT outsider. He's a contracted employee. He is not a career banker. But we have a mixture of career bankers who understand the business and outsiders who have had external experiences, overseas experiences working within the IT team. So they understand the business requirements and they have a knowledge of IT techniques. And it has been a very fruitful, collaborative effort. And that really is the key to our success.

ED: I asked these questions because a state-owned bank like People's Bank in any country also has the unenviable task of carrying state-owned employees, unionised employees, state charters and so on. So how much legacy do you find yourself carrying with you that is part of the cost of running a state-owned bank?

RG: We were very successful, I would say, in communicating our vision to these union leaders. At the initial stages, they thought it was a threat to their members’ job security. But I think we have passed that stage. And now they understand that this effort, this digitalisation and making the bank a modern bank is really imperative in order to be successful, be alive for the next century. Or maybe for the next decade, I would say. If you don't change, we will definitely be going under. So that's one thing that we were very successful in communicating to the union leaders and they were very receptive. So they gave all their support to our efforts. That's one thing. That's from the union side. And the government also was very proactive. And the government was specially looking at digitalising the entire country. And they were on a digitalising drive of the government, they themselves. They thought that this gives good synergy for their effort. So they gave all their encouragement, all their blessings for what we have been doing. Those aspects were very much in our favour, when it came to digitisation.

A tough balancing in running a state-owned bank

ED: You became chief executive under very interesting times. The previous chief executive had issues in terms of his procurement and stuff like that. And yet you were from the ranks. So obviously your integrity, your ability, your execution skills, were not in question at all. Give us a sense of your own progress professionally and the moment where you were asked to take on this role of chief executive and what kind of mindset change was required on your part? And do you feel that you were ready for this role? Or are you learning in the role?

RG: Well it's a mixture of both I would say. As I mentioned earlier, at the start of my interview, I had the good fortune to work with so many leaders, I would say. They were technically competent in different areas. If I take my previous CEO, he's a guy from treasury, he's a treasury expert. And I worked with certain other guys, who we're risk experts. So everyone took it upon themselves to mentor me for the leadership role. And at every step of the way, my ability and my keenness to learn and execute, I think, rubbed off on them. And they ensured that I will go into a more prominent role. Probably they had seen something, which even I did not see. But they always promoted me to bigger responsibilities. I think my approach to work would have been something that is unique in state bank setup. That could be the reason. And I had the blessing of everyone, including the board, including my seniors, including my peers, and the subordinates, they all supported me. And I will not describe myself as run of the mill banker from State Bank. Because I always aspired to be a little different, and that they sensed. And there's another unique factor in People's Bank, which is not present in in any other state bank. Our top management consists of career bankers as well as bankers from the private sector who are on a contract basis. They come from different work ethics, different experiences, different specialties. And we had the good fortune to work with all of them. And the entire team worked very well together. And in such an industry, it was very good for the development of a banker’s mindset and a banker’s approach. That has been the advantage and that has been the fortune, as far as my career is concerned.

ED: You’ve got a strong risk management background, you’ve got a strong finance background, you understand the cost function, and actually the cost function, your cost to income ratio is on the high side a little bit, isn't it? It's like about 60%.

RG: Yes. That, I feel is a legacy of a government bank. We need to look after our employees. And there's a little bit of a lopsided nature in the salary structure, compared with the private sector bank. But I think that is one of our strengths. Because our workers, down the line, they're very happy. At the salary scale they are getting, they don't have to look for the jobs, they can make a career out of it. The only challenge for us is to make them not feel complacent and that they are on their toes and give them incentives based on performance, recognise their skills, recognise their potentials at a very early stage. Because of the peculiar structures within a state bank’s setup, we can't change salaries. It's very difficult to motivate or incentivise a particular employee based on his potential and based on his contribution. It's difficult there. Salary structures are very fixed. Monthly bonuses are fixed and all bonuses are fixed. So it's very difficult. But we have taken on the challenge and we have come up with various hybrid formulas that ensure that they keep themselves motivated and competitive. And that’s working.

ED: So as a leader at the moment and for someone who's taken on the role in April, what are the five most important priorities at the top of your head? What are the challenges that you've given yourself in leading this institution?

RG: I think the first thing that comes to me is the capital adequacy. As I said, I think before the interview, I just mentioned it to you. We can’t describe ourselves as a local bank. It's an international bank. We don't have an international presence but why is it an international bank? To the extent that we are in a network of international banks. We facilitate international trade. As it is, guarantees of international nature are done through our bank. We borrow internationally so we are an international bank, whether we like it or not. So we have to abide by international capital norms. Currently, my capital adequacy ratio is just about the required norm as for the Basel III guidelines. This is something everyone is looking at, everyone who deals with the bank by way of LCs, trade or people who give us bilateral loan lines, credit lines, everyone looks at this. So that is one of the biggest challenges in the current context. People's Bank has been created by an Act of Parliament, People’s Bank Act of 1961. They are the eyes of restriction on raising capital. Not share capital, not equity capital. But even there is a restriction on raising the venture capital. So we want to take that out. And we are trying to get the People's Bank Act amended to ensure that we will be able to go to the market, international market or local market, to get the venture funds, debt funds that will be eligible. Those funds will be eligible to be counted as tier two capital. So we are struggling with that. That's one priority.

Then the next one, I would say, is profitability. Because we don't want to be the second runner up or the first runner up. We always need to be the first in the sector. If you take the entire group, People's Bank and the People’s Leasing Company and the other related group companies, we are the biggest, one of the biggest financial service providers. We are bigger than even the Bank of Ceylon, on a group perspective. But as a standalone bank, we are second to Bank of Ceylon. But we are leading in leasing through our People’s Leasing Company. And I would say we are leading in so many other areas when it comes to rural sector exposure. Those are some of the plus points here.

ED: Do you have businesses where you are basically subsidising the economy, agriculture, where as a loss leader, are there any parts of the business that you are you are mandated to perform, which may not be profitable at all?

RG: I would say the regulators are very strict in the current context. So any directed lending is always discouraged by the regulator and even the government has stayed away from directing us to go for loss-making, loss leader type of lending.

ED: In fact, the governor was telling me that he doesn't encourage interest rate ceilings and so on. But there is an interest rate cap in Sri Lanka at the moment.

So you do operate with a little bit of a limitation? It's not entirely commercial in that way.

RG: When it comes to deposits, yes.

In that sense, yes. It's not entirely commercial. I don't want to comment on the regulators’ actions, but I feel that they are not doing themselves disservice by this action. It's giving big banks like us, probably a big advantage having a cap, because then the tier two banks can’t go above, so we will put it at the ceiling and everyone will come to us.

ED: So the last six months’ regulatory regime has not been necessarily bad for you?

RG: Not bad for us. And if you’re asking about the priorities and improving the service level, top priority is the service level. We need to up our game when it comes to service level. Having a standardised service level is the biggest problem. For myself, I find always that when the manager is good, then in our bank, the service is excellent. But if you get the average manager, you could always suffer. So standardising the service is one of the biggest issues.

Assessing the risks and opportunities

ED: You're a numbers man, you’re a trained accountant, a chartered accountant. So what numbers do you give yourself in terms of what you want to achieve?

RG: Well, I would say 15% annual increase in my profits is one of the biggest priorities but it’s a little bit of a tall requirement.

ED: But that's an interesting perspective, when you say 15% increase in profit, it means that something has to give somewhere. You know your cost has to give.

Do you think it’s achievable for this franchise? Because you’re part of the franchise all this time so whatever cost advantage you already see, you may have even been involved in reducing costs for the last five years.

RG: Correct. So I need to look at my cost structure. I need to look at getting the best productivity out of my current staff. Get them to produce maybe double what they are doing now, without increasing the top numbers made certain cost savings. Because of this digitalisation effort. If you look at our ATMs and cash deposit machine network, that is taking it in. It's now packed to the limit. Typical CDM machines, there's about 10,000 transactions a month. We are using that network to the maximum. Still, the Sri Lankan economy is a cash-based economy. Most of my customers who are coming to the counter, we were able to get them back to do their transactions through these machines, ATM machines and the CDM machines. So that has allowed me to keep my staff numbers lower and deploy them for different other things.

ED: Has percentage gain in market share for deposits gone up?

So the fragmentation at the lower level is still very strong. With digital, your competitors are not just banks. What are you afraid of? Who are on your radar screen as potential competitors or partners that you need to be looking at?

RG: I would say no, because the market is very small and the competition is very high. But we maintain our market share and that, I feel, is a big achievement. Twenty-seven banks are competing for a very small size cake.

I think these telcos are the biggest challenge. We are looking at collaborating with them, I don't think we can send them off, we can collaborate with them. On the small ticket items, I think we should be collaborating with them, with the blessings of the Central Bank also. And we have been talking to most of these telcos and we have already got a few things working. I am determined to work with these telcos and come up with certain models to improve our reach to the grassroots levels of the market man.

ED: You are trading accountant, but you have this little flair of being a salesman as a marketing man, which is great, because a CEO is the ultimate salesman in the bank. Where did that come from? Where did that savvy for promotion, promoting the franchise come from? You're not entirely a risk, man, you're not entirely a cautious man. You also seem to be taking risks on the on the marketing front, the promotion front? It's a good combination but I'm just curious, how do you view yourself?

RG: I would say risk is in my blood, risk management is in my blood. But that also tells me that I have an internal control that says, okay, that doesn't mean that you have to be averse to risk. It should be risk management. So you do as it says, you go out in the market but be picky about what type of transactions you get into. Be picky about what you do, how you see the entire process of a transaction. So I have been trying to inculcate that skill within my branch managers and my salespeople to see that, okay, you go out in the market and see what are the opportunities, but look at the risk aspects and think through the entire process. So I think it's a knowledge of seeing other banks doing what they do and networking with my peers in other banks, seeing what they do, what their approaches. And I am always a learner. And I always want to learn from people who have done that before me. So it's a game of continuous learning.

ED: So capital adequacy, profitability, service levels, these are your priority? The last six months in 2019 has been very tough for many banks. Do you think that the environment will become better in the next six months?

RG: And maybe motivating my staff to be working as one team and get them to contribute towards a common goal. That's my fourth priority.

Yes, I would say it's definitely going to go up. I'm a believer in cyclical nature of economy and the nature of banking, the banking fortunes, it goes through cycles. I feel we are in the lowest end of a bad cycle and I'm looking up for improvements. It cannot deteriorate further than this. So I'm optimistic to that extent.

ED: Mr Rasitha Gunawardana, thank you very much for spending time with me.

RG: Thank you very much.