Banking on the Future: An Interview with Chandula Abeywickrema from Hatton National Bank in Sri Lanka

Vital Savings Statistics (June 2007)* Total volume of deposits US$1,416Mn Total number of fixed deposit accounts 2.5Mn Total volume of regular savings accounts US$591Mn Total number of regular savings accounts 2.2Mn Total volume of minor's (under 18) savings US$35.3Mn Total number of School Banking Units 150 Loan portfolio($) US$1,243Mn * Source: Chandula Abeywickrema, based on June 2007 Interim Report

Hatton National Bank (HNB) is a leading commercial bank in Sri Lanka. The bank was created in 1888 to cater to the investors in large-scale tea plantations as well as to the small savers amongst the plantation workers. It became popular in the rural hills area, working through mobile banks and undertaking special services to targeted client groups. Today HNB builds on this heritage by offering innovative school banking products that promote savings by the younger generation. Learn more about HNB's strategy in this interview with Deputy General Manager Chandula Abeywickrema.

1. Why did Hatton National Bank launch school banking products?

We noticed that Sri Lanka had low formal savings rates compared to other countries in the region, and HNB's management believed that the bank had a responsibility to inculcate savings habits into young people. We started the school banking program as a "social corporate responsibility" activity, but soon found out this worked very well! The school banking program creates a sentimental attachment to our bank. Many young people stay with HNB when they become adults. One of our clients started banking with us a young boy; he is now a successful businessman and has stayed loyal to us!

2. How does this school banking program work?

The program allows school children from 6 to 18 years old to save money in a formal bank account by bringing their savings to school on a regular basis. Most students in the program save money to cover the costs of higher education. My personal estimation is that 70-80% of students save for higher education, whereas many of the remaining students use their savings to start small businesses when they leave school.

A group of student managers on their school premises The school banking program is managed by voluntary students organized in Student Banking Units. Units are composed of five student trained by the bank: a student manager, an assistant manager, and three officers. HNB organizes a Student Managers Conference every year as well as numerous regional conferences. HNB also has a Student Managers Association which is involved in sports and recreational activities for students. Through the school banking program HNB has trained and certified approximately 10,000 students in banking. In addition, the Student Managers program allows the bank to identify talented graduates and recruit them as HNB employees.

The school banking products build on the extensive school infrastructure. In Sri Lanka there is a 95% literacy rate and nearly all children go to school! However, HNB doesn't yet cover all schools. Today, more and more schools are approaching us to start school banking programs on their premises. We are committed to meeting this demand, and are keen to explore technology-based solutions.

3. What other types of savings products does Hatton National Bank offer?

HNB offers different savings products. We have fixed deposits products--both the amount and term are fixed (e.g., one or two year products)--and regular savings accounts starting at US$5, with no term or amount limits. Interest rates on fixed deposit accounts are approximately 15% per annum and 4.5% on simple savings accounts. We have also developed a "big bonus interest" savings product by which savings accounts with less frequent withdrawals receive a higher interest. There are no fees for withdrawals on savings accounts.

Typically, small savers start with a simple savings account and then acquire a "bonus interest" product before moving to a fixed deposit product. We started offering fixed savings products because the bank was already offering long-term lending products (over 7-10 years), and we needed a long-term deposit product to support them. These fixed savings products are a win-win: they are a stable capital base for the bank, and clients appreciate the high interest rates. Clients also particularly like the life and health insurance products that we offer in combination with the fixed savings products. Approximately 50% of HNB's total volume of deposits comes from fixed deposit accounts.

4. How does Hatton National Bank motivate clients to save with long-term products?

HNB has a lottery plan to motivate small clients to save higher amounts of money. We have been doing this since 1993, and it has proven to be very efficient. There is a real passion for lotteries in Sri Lanka, especially among poor people.

The bank's idea is to prevent people from spending their money on wasteful lotteries, while encouraging people to save for long-term purposes. The lottery plan is designed with a set of target amounts. For example, if a client manages to maintain an average balance of 10,000 Rupees (approximately US$90) for 1 month, he qualifies for a draw.

The prizes to win in the draw are typical long-term savings goals such as houses and cars. Small savers are thus continuously motivated to reach high balances on their savings accounts in order to qualify for the draw. I estimate that 10-15% of small savers graduate into average savers, partly thanks to the "lottery charm."

5. How does Hatton National Bank manage the costs of small savings mobilization?

A student savings unit

HNB combines different strategies to manage the costs of small savings. First and foremost, the bank has built a low-cost delivery model. The bank has over 160 fully-fledged branches, and we cover remote areas with "extension offices." These offices are run by field officers who visit various localities by motorcycle. When a field officer visits an extension office--usually on a weekly basis--she or he is able to deliver the full range of financial activities offered by the bank. In order to limit security issues, we make sure field officers only carry small amounts of cash, and they are all insured. The bank also collects savings at schools through "Student Units" managed by voluntary students. HNB officers collect savings at these units once a week. Both of these delivery models are very low-cost for the bank.

Secondly, the bank pays limited interest rates on simple savings accounts (approximately 4.5%) and only remunerates savings accounts with balances above US$10. Finally, HNB has its own subsidiary insurance company, and we are very keen to cross-sell our various credit, savings, and insurance products.

6. Do you see small deposit accounts paving the way to (future) profitability?

At HNB, we believe in creating a savings habit. We want people to start saving small sums and to gradually reach higher amounts. We know that small deposits create a continuous inflow for the bank. Approximately 30% of our overall savings portfolio is made up of small savings accounts, but we also have 30% of medium size accounts and 40% of big savers. This allows the bank to balance out costs.

7. What are Hatton National Bank's other innovative savings products?

The bank's mascot, encouraging children to save

We have a range of innovative ideas to make people want to save with HNB, and we have targeted products for all market segments!

Children savings accounts

Based on the success of the school banking products, we have launched several products for children. We give young children an elephant-shaped till for them to put their money in at home, and we open savings accounts for them at the bank. These are long-term savings accounts, remunerated with a 5.5% interest and savings can only be withdrawn when the child turns 18. We now have over 400,000 children's savings accounts with a balance of over US$35 million. The children's savings program has also been a very successful marketing tool, since the children accounts have attracted many parents and even grandparents into banking relationships.

Remittances linked with savings services and credit offerings

Approximately 10% of the Sri Lanka's population of 20 million people is currently working abroad. In 2006 remittances to Sri Lanka amounted to an estimated US$2.4 billion. Remittances are an enormous and growing market! We wanted to attract these remittances to our bank while encouraging people to save a greater part of the funds they remit. In 2006 only an estimated 1% of the funds remitted home were saved.

HNB now has 20 staff members based in the Middle East and Europe, and we partner with local banks to offer remittance services. We have developed our own software called Money2Home. We educate clients on the value of formal remittances: it's safer than using informal remittance mechanisms, and it allows clients to build up a credit history.

We have recently developed an innovative remittance product with a savings component linked to a credit offering. The sender must save 5% of the funds remitted each time she or he sends money. After a certain period, he or a member of his family can take a credit of up to ten times the amount of the funds saved. This is a great incentive for migrant workers to save with us! They also get a 50% reduction on premiums if they subscribe to a health insurance product for themselves or their families. This remittance product has been exceptionally profitable for the bank.

Savings for all!

On top of the school banking products, children's savings accounts, and remittance-linked savings products, we have recently developed a senior citizen banking product. We pay 1% extra interest rates to senior people saving with us.

This older clientele also particularly appreciate our free health insurance product, by which they can receive reimbursement of hospitalization expenses. At the other end of the life-cycle, we have just developed infant savings products. We are offering this product in our partner hospitals. As soon as a baby is born there, the parents can open a bank account in the name of the infant with a minimum of US$10 deposit. In Sri Lanka, it is considered a good omen to offer valuables to the baby on the day of birth. With this infant account, parents and relatives are incentivized to place money in the child's account instead of offering other gifts such as gold or jewelry...

For the moment, neither the senior citizen product nor the infant account product is profitable per se. What we do is we cross-subsidizes these products with other, more profitable, products.

We developed all these targeted savings products because part of our vision at Hatton is to cover all segments of the society, while offering useful services to an array of clients. And in the long term, we believe the infant accounts will probably bring us the same benefits as the children's accounts, while the senior citizen program already gives a very positive image of the bank. So all these savings innovations are beneficial in some way!

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Chandula Abeywickrema
Current Chairman of Banking With The Poor Network, Chandula Abeywickrema is Deputy General Manager for Hatton National Bank. He graduated with a Bachelor of Commerce (Special) Degree from the University of Kelaniya, Sri Lanka, and he has obtained professional exposure in credit analysis, marketing, business and leadership skills, and finance and banking in South East Asia. In his current position at Hatton National Bank he is responsible for Personal Banking & Network Management. In this capacity he overlooks a wide sphere of key areas including micro financing and agricultural banking, personal-related credit facilities, marketing, network management, credit cards, leasing, and pawning services.