Banking industry to broaden capital market access
Unit Trusts are a powerful instrument for democratising capital markets and bringing them within the reach of many, top industry officials said.
“Unit Trusts are meant for small savers and are meant to broad base and get access to a large majority of people for capital markets.” Ruvini Fernando, Head – Financial Advisory, Deloitte Sri Lanka and Maldives told an audience of bankers recently. Noting that wealth management is an avenue to encourage both large as well as small savers, wealth management products, especially in a bank, offer diverse ways to diversify one’s savings, she said.
“There are different profiles of investors in a bank. Each has a different appetite and expectations of returns, some are concerned about managing their tax exposures, etc. Therefore, the Unit Trusts are a good way to encourage small investors on a regular basis and for regular income earners to build up a savings base. It is a diversity that a bank can offer.”
She also noted that banks have a lot of credibility and presence due to their branch network, as well as digital banking platforms and can reach a larger number of customers in this regard. “Rather than buying into individual stocks, buy into an equity fund which will give a properly managed, equity product.” Banks should foster understanding between staff and managers, offer diversified product ranges, and provide portfolio management to ensure customer satisfaction, she said. “Between banks and insurance, they have found a nice way of working together, which is Bancassurance. Similarly, there may be many ways for banks and wealth management companies to learn to work together and enhance the offering to the client.”
Dishan Wirasekara, Managing Director/ CEO of First Capital Holdings acknowledging this, said that the insurance companies and the banks don’t see each other as competition, but as complementing each other to achieve one objective, which is the mindset that is needed between banks and capital markets. Noting the assets and liability mismatch in the banks as a long-standing issue, he explained that banks take deposits, which are short-term and give out long-term deposit loans. “Therefore, inherently, the banks keep that risk on that balance sheet, and because of that, (this risk) is priced. This is why the net interest margins in Sri Lanka are fairly thick at 4 to 5 per cent. The economy in the country is paying for this. If there is a way to minimise this risk that the banks are taking, and allow that transmission at a more efficient pricing, the country will benefit.”
Explaining the banks’ asset and liability book, he said that the current account to savings account (CASA) ratio is 40 to 45 per cent, whereas the time deposits are at 55 to 60 per cent and are concentrated at more than one year. “No one wants to borrow short term, but medium to long term because they have some certainty in the repayment.” Using capital market instruments as a bank to raise cash for liabilities and minimise mismatch to break away from this cycle should be encouraged, he said.
“Now, on Tier 2 capital, the banks already do it. There are Basel III-compliant debentures with a convertible option, but they don’t issue senior debt, a normal listed debenture to attract deposits and minimise the mismatch. It is not contributing to a bank’s deposit base, as its investors are buying their debentures. They are in the balance sheet as a different form of a liability and not as a time deposit or a CASA, but as a Debenture holder.”
By issuing that instrument, banks can eliminate the mismatch between assets and liabilities and transmit back to the lending side of the books at a cheaper intermediation cost, he explained.
Chairman, Securities and Exchange Commission (SEC), Professor Hareendra Dissabandara, noted the importance of changing the mindset of the public. The SEC aims to educate the members of the cabinet as well as the Parliament, he said.
HNB Managing Director/CEO Damith Pallewatte noted that the banks are faced with a dilemma in the level of sophistication of the customers in promoting such products. He noted that small and medium enterprise customers are reluctant when banks promote anything other than debt finance.
“There is a tendency where entrepreneurs or enterprises are reluctant to let go. They would prefer a debt over capital investment by divesting part of their shares. So that prevents us from introducing capital market-related products. So even if we have the instruments, there has to be sophistication and awareness about their uses to push them. One of the things that the banks are doing at the moment is how to facilitate that awareness, like with Bancassurance.”
He said it is important to explore the role of banks in attracting their customers to capital markets by offering various insurance options, considering their risk appetite and the banks’ larger role in building trust and attracting their base. Awareness, mindset, the process, and procedures are pillars that need to be worked on, he added. “Incentivising those who want to come into the capital market is important,” he added, noting that looking at the tax structure in this regard is also important.
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