DFCC: Development's quiet sustainer

Lynn Ockersz

DFCC Bank could be described as a quiet but effective backer of Sri Lanka's development drive. Although endowed with multiple functions, one of DFCC's principal aims as a Development Bank is private sector entrepreneurial development, which in turn could impact positively on the country's collective well being, when pursued energetically and consistently.

In this interview, DFCC Bank's General Manager/Director and Chief Executive Nihal Fonseka says that development as conceived by his organisation and the world at large is to "help the small to become medium and the medium to become large".

A recipient this year of the prestigious "Oustanding CEO" award, conferred by the Association of Development Finance Institutions for Asia and the Pacific, Fonseka is of the view that although he was the individual recipient of the award it should be seen as having been won by the entirety of DFCC's staff, who put in a fine collective team effort to achieve the Bank's aims over the years:

Q: From being a State-controlled Development Bank, DFCC is today a more diversified, commercially - oriented lending institution. Could you outline DFCC's current functions?

A: DFCC was never a State-controlled bank. That is a misconception people have. NDB was a State-controlled bank, DFCC never was. It was set up in 1955 by an Act of Parliament. From then on it was a listed company on the Stock Exchange. Its share holders included, State sector institutions. But the majority shares were held by the private sector.

But, you are right. It was a Development Bank set up by a special Act of Parliament, but with State assistance in certain aspects. The main aspect there, has been in relation to accessing long-term funding. That is provided for in the Act of Parliament and the Government has assisted DFCC continuously and continues to assist in accessing funds.

When you talk of the present state, DFCC is still a Development Bank but perhaps what is relevant to understand is what a Development Bank is in the context of today's world.

There was a time in the early stages of DFCC's life when Sri Lanka was not industrialized, where the emphasis was on the industrialisation of the country and DFCC actively participated in any industrialization policies the Government has had.

When I say government, I mean every government which has governed the country from that time. So, when you look at any area of industrialization DFCC has had an involvement. To name a few, several of the large, well known businesses in this country started off with DFCC as a backer. People like Maliban and the Maharaja Group come to mind. We have always been involved in people who have elaborate industries. Ceylon Glass is another example.

Then when we went out of pure industrial activity to the services sector, specially the tourism sector, when the hotel industry was to develop, DFCC was a very active participant in that, so much so that, there was a very significant exposure the DFCC had to all the first generation hotels in the tourism sector. There was also the apparel sector. When the focus changed to the export-oriented sector in the late seventies, DFCC was very active in that sector.

After the liberalisation of the plantations out of government control, when the private sector involvement was brought back into the plantation sector, the Plantation Management Company concept was introduced, DFCC was actively involved in that.

So wherever the country has had a thrust, the DFCC has been highly involved. That continues. More recently, the renewable energy sector, the mini-hydro sector - DFCC is a key participant in those sectors, not only by lending to those projects but by also administering those projects, capacity-building etc. Another sector which we can identify, is the telecommunication infrastructure sector. We have been heavily involved in the telecommunication sector.

But the thrust of DFCC has been in private sector entrepreneur development. That is the basis on which DFCC was originally founded that is going on unabated. The difference that has happened over time is that, as an institution, the concept of development has changed.

Now the concept of development is not putting a few factories up here and there. Whatever development that takes place has to be sustainable. Commercially viable. It should not be something that is there for a few years and our idea is to help the small to become medium and the medium to become large.

So, there is sometimes a misconception now that our thrust is not in Development Banking. That is incorrect. For instance, if one goes through our Annual Report for example, it would be found that about half of our lending takes place outside the Western Province.

About 50 per cent of our lending is to the SME sector. So, this is all basically because we still follow the development agenda. Why the activities have come in is because the whole concept of Development Banking has changed, not only in Sri Lanka but all over the world. Because, the expectations of the clients of DFCC have also changed.

They are looking forward to getting a full gamut of financial services and not just a long-term loan. They require other facilities: venture capital facilities, trade finance facilities etc. DFCC had to make a transformation because prior to 1995, DFCC was not even a bank. It was a development finance institution.

An important amendment that the Government brought in in its wisdom was to change the status of DFCC to a bank. Once you become a bank you have first be a bank. You cannot be a bank and not act like one. So, there are certain things which had to change.

There were the various regulatory regimes, requirements for instance. So, DFCC had to reposition itself to meet those requirements as well. But there has been no change in the primary thrust of DFCC. But we have added on other things which supplement and complement our primary thrust. Those we have had to do so that we could remain active and competitive in this market place.

Q: So you could say that you are actively contributing towards the development of the country?

A: We are, we are. Every sphere of activity where there is capital investment we are involved in. Our relative importance may have reduced because we are small in comparison to other financial institutions, but in what we do our thrust is in development.

Q: Apparently, the bulk of DFCC's revenue comes from interest income. Could you briefly describe your chief revenue instruments ?

A: A bank's chief revenue has to come from interest income. Our chief revenue instruments are, basically loan products. These take different forms. It can be project loans and also leases. These are the key products which we offer to our clients.

These two constitute the bulk of our portfolio. We also provide a component that is called the Permanent Working Capital in a business loan but, that is a relatively small portion. We do have some exposure to equity but that has reduced over time because there are certain constraints in a bank which is regulated as a bank having significant exposure to equity. But we do have some quasi equity.

But we also go beyond these and offer expertise and capacity - building in the project formulation stage. We have several people who come to us from the regions who formulate project proposals without expert input.

When they come to us we make an evaluation of the feasibility of the technical aspects, the marketing aspects, because they work on certain concepts and those concepts are not necessarily valid based on the knowledge that we have. They may make certain assumptions which we know based on our previous experience, are not correct.

So, we are able to use that knowledge and tell them, okay, you cannot make those assumptions. You have to rework your numbers and your feasibility based on other criteria. That is where we add value. But that is not visible because we offer this most of the time, free. That is not a revenue-generating thing, but part of the business mandate we adopt. But visible revenue comes from interest income.

Q: What is your chief vision for DFCC?

A: Well, the vision for DFCC is to my mind linked to a national vision which should be developed for the total financial sector of the country. If you have read our Vision Statement, you would have realised that our aim is to be the pre-eminent financial services group in the country.

When I use the phrase financial services, I use it very broadly because in the modern day a very segmented approach to financial services is not sustainable. Because for a variety of reasons, I think the financial services should develop into a conglomerate of services.

It can be working capital, it can be project finance, it can be the capital market side, it can be the foreign exchange side, it can be insurance - it can be all sorts of things. My vision is that I wish DFCC to be one of the top groups in this country, as a financial services group.

Q: What is DFCC's current relationship to the State?

A: Our current relation to the State, as I said earlier, is that the State supports us in accessing long-term funding. As you know, much of the funding available in the local domestic market is basically short-term. Customer deposits are usually one year or two years.

You cannot prudently undertake long-term project funding without having long-term committed funding lines in place. If not you are running a great risk that the persons who are providing short-term funding may take those funds away. Whereas you have to commit yourself to much longer term funding to your borrowers.

So to access long-term funding, we do it through two parts. Whatever is available we access domestically on our own steam. We go to the market and deal with those institutions on a one-to-one basis, such as insurance companies, pension funds etc. But much of the long-term funding which has come into Sri Lanka has come in from bilateral and multilateral funding entities.

While those entities are very happy to provide such funding to Sri Lanka, they have to necessarily do so through the State because their mandates require it and the State provides us that intervention support. But what has happened over the years, compared with long time ago, when development was considered in a different light, when the State actually provided significantly subsidized funding - that model has changed.

Now the State also prefers to operate on market-based funds. So while they provide that intervention, they move away from subsidised funding more to that which is market-based. We have to deal with that change but the State does support us and the State as a result of that is entitled to have a Director on our Board, which it does have and is nominated by the State.

Some State institutions have shares which are pretty old. They are holding them for their own value. So that is the relationship we have with the State.