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| Sunday, 14 July 2002 |
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Call to permit development banks to broadbase income stream The Government should loosen its hold on captive sources of domestic long-term savings while permitting development banks to broadbase their income stream by offering their customers a wider range of lower risk products, Chief Executive and Director of DFCC Bank Nihal Fonseka said. In the company's annual report for 2001/2002, he said that development banks are now facing the prospect of diminishing long-term lines of credit from multilateral institutions and these are being made increasingly accessible to commercial banks. Development banks broadbasing their income stream will give them the necessary strength and stability to pursue higher risk long-term lending. "Although some have expressed views which seek to perpetuate the compartmentalisation of financial services, they seem to be under the misconception that broadening the product range will lead to development banks abandoning their primary role. Rather, it will be strengthened," he said. DFCC Bank continues to place strong emphasis on information technology, resource mobilisation and human resource development. It will invest Rs. 300 million over the next two years to implement a core banking software solution to enhance its efficiency and effectiveness particularly in the areas of lending, deposit mobilisation and treasury operations, for which it has already finalised the selection of the software package. The company will focus on enhancing its IT capability, strengthen its management of non-performing loans, refine its credit rating system to adopt a comprehensive risk-based loan pricing mechanism and closely monitor the capital efficiency of its investments. Fernando said: "We see significant opportunities in funding physical infrastructure and service industries such as IT, power, telecommunications, education, healthcare and a role in the rehabilitation of the North and East if there is sustained peace. These build on our core competencies in development banking. "We will continue to interpret our development role broadly and expand its operations in areas such as corporate finance and capital markets. Our resource centre will be streamlined to provide more value added services to new and existing customers." The bank is also considering a share option plan for management as it feels that the time is now opportune to further align employee rewards to the fortunes of shareholders. Chairman E.M. Wijenaike, in his statement in the annual report, said: "An option plan is preferred to a traditional ownership plan as new shares will be created only if recipients exercise the options at a future date, which in turn will depend on shareholder value being created in the intervening period. Shareholders' approval will be sought before introducing any such scheme". The expected economic recovery, acceleration of privatisation and revival of investor confidence could translate not only into better prospects for the bank's core business of long-term lending, but also open new avenues of business at the shorter end. The reforms in the financial sector are expected to present the bank with new opportunities to offer its clientele a wider range of products than is presently offered, the Chairman's statement said. The significant gains made by the bank from its money market activities and proactive management of the rate volatility of its assets and liabilities coupled with cost controls and effective management of the non-performing loan portfolio helped it achieve a profit after tax of Rs. 628 million in 2001/02, a 70 per cent increase over the previous year. The profit after tax with the inclusion of its subsidiaries and associate was Rs. 857 million, a 37 per cent growth over the previous year. The group's profit before tax during the year under review was Rs. 1.3 billion, a 54 per cent growth over the Rs. 818 million in 2000/01. The Rs. 4 billion total income was a 17 per cent increase from the previous year's Rs. 3.5 billion. During the year under review, the bank had approved new loans and other credit products totalling Rs. 10 billion. High interest rates during the first half of the year and political uncertainty in the second had affected the utilisation of approved facilities. These resulted in only a marginal growth in the loan portfolio due to loan disbursements roughly equalling repayments. On March 31, 2002, the bank carried forward Rs. 3.6 billion in undisbursed loan approvals which is 54 per cent of the total loan approvals during the financial year. "The improving business climate should result in the early disbursement of these commitments while permitting us to seek new business more aggressively," the Chief Executive's report said. DFCC had focused on the restructuring and rehabilitation of sick projects and the orderly transfer of assets of failed projects to new investors. These measures yielded positive results with non-performing loans decreasing from Rs. 3.5 billion to Rs. 3 billion in absolute terms and the ratio improving from 20 per cent to 17 per cent despite no material growth. A more conservative provisioning methodology for bad and doubtful debts was adopted by the bank during the year under review. This resulted in a provision of Rs. 518 million being charged against profit, compared with Rs. 446 million in the previous year, including a general provision of Rs. 57 million. |
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