By Sanath Nanayakkare
Veteran banker Russel Fonseka who is the General Manager/ CEO of Bank of Ceylon said last Thursday that it is basically the customer who decides the lending interest rate according to the profitability and financial viability of their business operations.
He said so in response to a question posed by The Island Financial Review at a press conference where the BOC announced a new SME loan quantum of Rs. 5 billion for small and medium enterprises (SMEs) and startups.
“The Central Bank’s independence in making its monetary policy is a positive thing for the financial market as well as our customers because the Central Bank will be making those decisions according to market conditions. At the end of the day, interest rates are decided by the market. Even BOC’s lending rates are basically decided by our customers. If they are not okay with the interest rates we offer when they compare with their sales targets, profitability and other financial aspects of their operations, they will make their own decision. In most of the cases, our lending rate is decided by the customer. Our customer is the person who gives the interest rate. They would say, ‘this is the interest rate we can afford to pay. If you can offer it, we will take it, or otherwise, we will go to other banks. So, our task is to see whether we can match the customer’s requirement and do business with them, “he explained.
“BOC has the largest deposit base, so we have the ability to offer better lending rates. Further, as the Central Bank has decided to reduce the Statutory Reserve Ratio (SRR) applicable on all rupee deposit liabilities of Licensed Commercial Banks (LCBs) by 200 basis points, from 4.00 per cent to 2.00 per cent, that will accrue great improvement in BOC’s liquidity levels as well,” he pointed out.
When asked by how much exactly the favorable SRR would raise BOC’s liquidity levels, he replied,” We are getting a significant amount because of the reduction in SRR,” without disclosing an exact number.
Responding to how BOC could offer Rs. 5 billion worth SME loans 5% below current market rates, he said,” Although we offer the new SME loan scheme loans at 12.0 for applicants with collateral and at 12.5% for applicants with no collateral, our funding cost is a little bit higher. But when we compare this Rs. 5 billion loan quantum with BOC’s total exposure in lending which is about Rs. 2,300 billion, this Rs. 5 billion is nothing for BOC. That is why we are in a position to offer this Rs. 5 billion quite comfortably to support the recovery and growth of SMEs.”
Referring to non-performing loans (NPLs), BOC GM said,” Because of the economic conditions, our NPLs at 6%, is a little bit high, but the key thing here is we haven’t written off any loan facilities given in the past 10- 15 years.”
When asked about the Domestic Debt Optimization (DDO) and, repayment of Sri Lanka Development Bonds in LKR, a senior official of BOC said,” We have been given different options. We have carefully analyzed the operational environment. We have made the required provisioning and there won’t any impact on our performance as a result of the DDO. We will be releasing our 2Q financial report this week. The challenges from NPLs are abating now as our customers are having improved cash flows, so we can maintain our asset quality position which you will see in our 2Q financial report.”
BOC is analyzing which treatment of debt exchange would best suit the Bank and the Bank’s senior management and the Board of Directors would decide on which option to take. The Bank affirmed this important decision would be an internal decision.