Financial Times

Maxi Prelis - from engineering to banking

Moksevi Prelis, the CEO of Nations Trust Bank, retires on 31 March 2004 after a 27-year career in banking and seventeen years in the manufacturing industry. He started as a mechanical engineer but switched professions in mid-career because of frustration with government bureaucracy. In this interview with The Sunday Times FT, he talks about his long career and the many issues during that time.

What made you switch from engineering to banking?

This happened in 1975 when I was holding a managerial position at the Steel Corporation. I was very enthusiastic about working in the industrial sector because I felt at that time the steel industry is the base for heavy industry and the industrialisation of the country.

Despite my enthusiasm, I found that government policies and attitudes at that time were not focused on improving productivity and profitability of public corporations. They were tightly controlled by ministerial bureaucrats and highly politicised unions. I felt that all that the managers could do was live and let live. To me it went against the grain. I was seriously considering going back to the US but seeing an advertisement by the Bank of Ceylon I applied and was selected.

However, my love is really for manufacturing industry because I feel manufacturing industry, agro-production and also high value added services are the real generators of economic value not banking.

I personally have the view that in a developing country like Sri Lanka banks per se should not be considered as an end business by themselves where shareholders invest in order to maximize profits. Instead banks are very vital intermediaries whose main objective should be support of the economy and particularly the real productive sectors of the economy.

Banks here have been doing extremely well by themselves. If you take the last 10 years of Business Today's top 10 companies, consistently more than half have been banking institutions. I consider this an abnormal situation whereas it should be major business enterprises particularly those engaged in productive enterprises that should have had greater representation in the top 10.

Are you disappointed that the dreams of industrialization of the country you had were not realised?

Yes, I'm disappointed. In the 1950s and 1960s it was generally considered that industrialisation was the key to development.

In my view, our private sector is deficient in technological know how - I mean technology in a wider sense - and a technological innovation mind set among the leadership. Consequently, there appears to be a lack of enthusiasm for technology-based business. Manufacturing and technology oriented enterprises should be led and dominated by people with an innovation and marketing mind set rather than purely an accounting-type mind set.

If ours is still a trading economy and efforts at industrialization failed, can't one blame the development banks since it was their role to support the development of industry, particularly SMEs?

To some extent the development banks could also be criticised as to whether they gave sufficient support to stimulate industrial development.

However, one must be fair to the DFCC and NDB - they both played a very vital role in industrialisation and economic development by financially supporting long-term loans and equity finance in several major segments such as textiles, garments, food processing and the tourist hotel sector. In fact during the early stages of tourism development in the 1960s, 1970s and 1980s, DFCC played a major role.

Development banks were criticized for not taking enough risks. What were the difficulties and constraints you'll faced in giving more support to industry? Even now such criticism is there.

Now the criticisms might increase because both DFIs have become more commercially oriented. Both NDB and DFCC have large pools of government supported long-term funds at concessionary rates, although these may not be available in the future. Since most of these funds have a 15-year repayment period with perhaps a five-year grace period for repayment, these institutions can lend comfortably for 5-8 years to productive enterprises for capital assets at lower interest rates than the commercial banks. And yet due to repayments these funds could be recycled once again for other enterprises. However, I must tell you that until the 1990s DFCC was excluded from financing any public sector enterprise unlike NDB. In the past most of the lines of credit to both DFIs specifically excluded these being used for financing trade and working capital since such concessionary funds were given to finance capital assets of productive enterprises.

However, it is important to realise that banks, even development banks, cannot by themselves create industry since these projects have to be started by entrepreneurs or by the public sector. However, development banks could take a role of being a catalyst.

Banks are financial intermediaries whose function is to mobilize savings and finance productive enterprises.

The private sector at that time was itself not getting too heavily into industry. Banks could have done more to support industry but banks alone can't do it.

You need entrepreneurs, infrastructure, correct economic policies and political will.

The failure to industrialise sufficiently may partly be explained due to the internal market being too small and the economies of scale required by industry being absent.

Furthermore, the import substitution economy of the 1950s and 60s that was necessary to kick start industrialization, unfortunately was kept going too long because of vested interests.

The other important reason is because we did not have carefully planned and consistent industrialisation policies. In developing countries such as Sri Lanka it is unwise to expect market forces and laissez faire policies to deliver the goods. It is significant to note that many countries in Asia including India at comparable levels of economic development had major initiatives and institutions for planning and government policies were more focused and interventionist.

Given the mixed economic policy announced by the PA-JVP alliance, do you see any drastic changes in the economy if they win at the forthcoming election?

From what I gather about the manifesto of the PA-JVP alliance there does not seem to be a major shift in economic policy. They seem much more supportive of local manufacturing and agro-production which, in my opinion, is very positive. But of course in translating such policies into practice there could be many issues and problems.

One will need realistic planning, the right people, above all consistency. You can talk it but also you must walk it - you may not be able to walk it fast but at least you must walk the talk, particularly in productive enterprises like agriculture and manufacturing.

In infrastructure such as power and highways in most countries public ownership is predominant. Some state ownership will remain. Some of the larger enterprises such as steel and cement were started by government as public sector enterprises in 1950s and 60s because at that time the private sector would never have started these industries - they had neither the appetite, nor the know how, nor the long term perspective. Our private sector is largely very short-term oriented with a trading mentality.

There is nothing wrong in government ownership. In fact in many Asian countries such as Singapore major enterprises were government sponsored and owned such as Singapore Airlines, ship yards and telecoms. But it is vitally important that they be run in an efficient manner. Unfortunately, this was not the case in our public sector.

Do you accept the announced policy of making Sri Lanka a financial hub?

I call it a pipe dream. If you ask 10 different people what they mean by financial hub you will get 10 different answers - in the sense that their impression might be different depending on their current business. Also, if you look back, we have been having this slogan for the last 20 years. It has been reported in the media, everyone has been saying it. But are we any closer to being a financial hub now than then? I don't think so. That itself should give an indication whether it is a pipe dream. Thirdly, one has to ask why do you want to make it a financial hub. What do you gain by it? Will it benefit only a few people, maybe a few professions? What does it do to a majority in the hinterland? Development for whom? Development must be for the vast majority of people. And of course, to be an international financial hub you need other things like political stability, infrastructure, you have to invest money. I think this is one of those things that distracts one from the not-so-glamorous issues of development.

What are your views on the current controversy about the high interest rates charged by commercial banks for lending and the low rates on deposits?

There are two views. If you ask businessmen, the SMEs and the chambers, they'll say banks' costs are too high and they keep large margins. If you ask bankers, they'll point out that although their profit in rupees appear large, their return on assets are not abnormally high. Both views are true. In fact, the margins of the commercial banks in general are among the highest in Asia. At the same time, the real return on assets- if bad loans are properly provided for - are also small. Why? It is once again the economies of scale - because our banks all put together are relatively small. In fact, the top 10 Sri Lankan banks, including Bank of Ceylon and People's Bank, put together comes to the size of about the second largest bank in Malaysia, which does not have a very large banking sector.

And yet the overhead costs are high - not only for staff but for infrastructure like IT, ATM networks and credit cards. There has to be a minimum outlay if you have to be modern and our banking sector by international standards, while it has a lot further to go, is not bad in terms of infrastructure.

But these are expensive. Also, there is no sharing of infrastructure. Our banks may be one-tenth the size of foreign banks but their costs are not one tenth. So banks need volume. By having a large number of banks, you find that none can recover costs - infrastructure and personnel costs.

Do you think we have too many banks?

I think so. All that you need is four banks. At least to get some sort of volume. But also, very importantly, banks are not an ordinary business where owners put money, start a business and if they do well it is fine, but if not, they close up. You can't close a bank. It is a channel for other businesses to thrive and for savers. So savers must have confidence in the continued existence of banks. Also for owners of banks, their financial stake is very small compared to that of depositors. The result is that the financial stake in a bank is with the depositors, not so much the owners.

Banks should not be too closely controlled by either an individual or a family group or even a business group. Which means, if we have fewer banks, at least initially, you must have very strong regulations, very intrusive regulations, which unfortunately we don't have.

Given the high costs of banks, high NPL levels, and the high margins they keep, are bankers are paid too much for not doing an efficient enough job?

By international standards, certainly our bankers are not paid very high at all. But compared to other segments of the economy, which are also vital, perhaps even more so, bank staff are relatively far better remunerated. Now, this creates advantages as well as disadvantages. One is that more good talent is attracted to banks.

But then the best people might end up in banks rather than the productive sectors of the economy like industry. Personally, I feel the best people should be involved in those sectors which are more difficult as they need continuous development, high technology, risk taking.

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