The business of small and medium enterprises (SMEs) and retail segments could die out soon due to the interest rate cap as it is impossible for banks to run lending operations at the 9 percent rate in these two high cost sectors.
This cautionary alarm was raised by Selim RF Hussain, who leads Brac Bank – the largest SME-focused bank in the country with 63 percent of its total portfolio in SME and retail segments. Brac disbursed Tk150 crore in SME loans through agent banking in the last few months. The bank has the largest network across the country with 187 branches and 456 SME units.
In January and February, the cost-to-income ratio of Brac Bank for SMEs was 85 percent, which means the bank spent Tk0.85 for earning Tk1. Its cost-to-income ratio is now 130 percent after enforcement of the lending rate cap. As a result, the bank's total SME portfolio of around Tk16,000 crore is now a loss-making venture.
In a recent interview with The Business Standard, Hussain, the managing director and CEO of Brac Bank, addressed some queries on the current situation of the economy and the banking sector.
As an SME-focused bank, Brac has to manage risky loans at high cost. What is the policy of the bank for running its high cost business with the 9 percent lending rate cap?
Although we are not coming out from small and cottage lending, it is a loss-making business at the moment. It is impossible to do this business at the 9 percent interest rate.
The number one objective of this bank now is to improve efficiency to keep continuing our SME business. We are trying to increase the number of loan files by one per employee and reduce the disbursement period. More business can then be done at the same cost. But even after that, it will be not possible to run small, micro, cottage and retail lending at this 9 percent interest.
We, along with some selected bankers, had a meeting with the Bangladesh Bank recently, where we raised the issue that corporate and large-scale lending can be run at single digit rates, but it is impossible for the retail segment. Banks can run SME lending at this interest rate for six months at the highest, but no longer. All SME lending will have to be shut down. The central bank assured us that it would reconsider the lending rate for the SME segment after the pandemic situation stabilises. If the interest rate is not relaxed, I can guarantee that the retail and SME business segments will be ruined.
We are only focusing on SME business but retail is also an important segment. For instance, we are financing Walton, which manufactures consumer goods like refrigerators, televisions, and washing machines. But how will customers buy these products if we do not provide consumer financing.
The size of consumer financing is huge in Europe and America, and their businesses will collapse overnight if it is shuttered.
I remember that my father bought a car at the age of 45 after saving up for a long time. His generation did not like taking loans. Moreover, consumer financing was not available then. But I bought a car at the age of 33 with a loan. My children might be able to buy cars at 25 years of age due to the availability of loans. This is how consumer financing is boosting up domestic demand and contributing to economic growth.
According to the Bangladesh Bank, the total size of consumer financing stood at Tk71,000 crore at the end of December last year – around 10 percent of total loans in the banking industry. The size of consumer financing will have to expand along with the acceleration of SME segments for the sake of the economy. It is because Bangladesh is dependent not only on export; the domestic market plays a significant role in driving the economy.
In the budget for FY21, the government set the target for increasing private investment from 12.7 percent to 25 percent. At the same time, private sector credit growth is expected to grow to 16.7 percent from the current 8 percent. What is the possibility of achieving these targets?
It is highly unlikely that private sector credit growth will increase to 16.7 percent in the next fiscal year. The number came down to 8 percent in March and April, and it will fall further. This is because of the 9 percent lending rate. When artificial pricing is imposed on the free market economy, it interrupts flow of money. It will neither be efficient, nor effective.
Interest rate capping was in practice during the '70s. Later, in 1990, free market policies were taken up by the government to reform the financial sector, and that is why the banking sector grew at such a large scale. Now, this interest rate cap is taking the sector 30 years back. The cost of a large loan and small loan is not the same. Monitoring costs for small loans, like that of Tk2 lakh, is higher than a large loan of crores.
What is your observation on the liquidity position of the banking sector in terms of supporting the economy?
The government announced many stimulus packages worth around Tk90,000 crore, which will be disbursed through banks. But banks did not get any grants from the government. The Bangladesh Bank will provide liquidity support to banks through easing monetary requirements. So, liquidity is there, although some banks have shortages.
However, despite having liquidity, private sector credit growth will remain low as there is no risk premium in pricing. In this emergency situation, banks will have to lend very carefully. Even stimulus packages will have to be managed very cautiously since there is a penalty for not recovering loans. Moreover, all the business sectors got affected by the pandemic. So, loan non-payment risk is high.
When lending to retail and SME segments result in losses, banks will be extra careful in lending to the private sector. This will ultimately hurt domestic consumption, adversely impacting the country's ambitious GDP target of 8.2 percent growth for the next fiscal year.
The market capital of Brac Bank at the Dhaka Stock Exchange (DSE) came down to around Tk4,000 crore and each share has been trading at above Tk30, which does not reflect the real strength of the bank. What is your policy for getting the real value and pulling up investor's confidence?
The artificial floor price rule brought a disaster for the stock market. When any artificial restrictions are imposed on the free market, it creates problems.
The market regulator got a new commission recently. All stakeholders, including banks, informed the commission about their disagreement with this artificial price rule, saying it will result in a negative impression about the Bangladeshi stock market in the international platform. Bangladesh may be removed from the Morgan Stanley index due to floor pricing. If Bangladesh loses its presence on this index, foreigners will not come to invest in Bangladesh in the next five to seven years.
Pakistan had imposed such a floor pricing mechanism in 2008 to prevent share prices from going below a certain level. It took 10 years to normalize the market due to this artificial pricing. Capital should be allowed to flow freely in the stock market. When interrupted, disaster is a must.
The negative impact has already been reflected in the stock market. The Bangladeshi capital market should be five or six times bigger than Pakistan and Sri Lanka, but it is not due to poor governance. If floor pricing continues, the market will lose its remaining capital within a few months.
How is Brac Bank planning to adopt to the new normal?
Quick adoption of the emergency situation by expanding digital services and ensuring health security of staff helped Brac to remain in a strong position. We were always operating even amid the pandemic. We continued services through various digital tools, which helped us increase deposits to Tk1,500 crore, of which 75 percent was current savings. The bank was also careful about its employees' health and that is why it spent Tk10 crore as coronavirus allowances in line with the Bangladesh Bank circular.
Moreover, the bank spent around Tk18 crore for providing protective equipment for its 8,500 staff. We added various digital solutions to adopt to the new situation. For instance, we introduced app-based agent banking solutions to serve customers from home during the pandemic. This is a real time solution and a first in Bangladesh.
All 13 lakh clients of the bank will be able to use the solution through biometrics. As a result, if clients come to the branch without a checkbook or debit card, they can still transfer payments. Without quick digitalisation, it will be impossible for banks to survive. Banks will have to reduce costs by using digital solutions instead of cutting salaries. Some banks are cutting salaries to reduce costs, which is absolutely unacceptable. They will have to innovate to reduce costs.