Responding to the 18% credit ceiling imposed by the Central Bank, MTI CEO Hilmy Cader said that banks and financial institutions will be forced to re-examine their cost structures.
“Compared to many businesses, the business model of financial institutions is based on extremely high fixed cost, with a very low variable cost element. In addition, over the last three years, the banks have ‘loaded’ their fixed costs, in response to the phenomenal credit growth. All this means, these institutions have a very high ‘break-even’ point, which in the light of the credit ceiling and reduced savings will force them to re-examine fixed costs” said Hilmy Cader
He further stated that “For instance, the City of Colombo has four times more bank branches than supermarkets! This is entirely fixed costs. Despite these high fixed costs, most of these branches are headed by conventional branch (admin) managers, instead of ‘hungry’ sales managers. Banks are also saddled with too many layers in their organizational structures, all of which would have been ‘disguised’ when there was top-line credit growth. Overall, the banks and financial institutions will now be ‘forced’ to pursue ‘lean and mean’ business models”.