While most banks are struggling to retain their profitability trend, amid volatility in the financial market and slowdown in businesses over the last couple of years, IDLC Finance has kept up its strong growth.
Despite being a non-bank financial institution, IDLC is now competing with the best performing banks and has become one of the top 10 profit-making institutions in the financial sector.
The magic behind the strong performance of the company is regulatory compliance, according to Arif Khan, managing director and chief executive officer (CEO) of IDLC.
"We believe that compliance increases profitability," he said during an interview with The Business Standard.
IDLC maintains 100% compliance in all processes – from loan disbursement to employee recruitment, he said.
While others think that non-compliance is profitable, IDLC always maintains compliance, which has helped the company achieve strong growth even in the face of many challenges, he continued.
High professionalism and its continuous strong performance have helped IDLC manage the Covid-19 situation efficiently, he said, adding that even though many banks opted for job cuts and pay reductions, IDLC did not do so.
Furthermore, the company provided support to its borrowers who failed to continue payment by extending the payment schedule by up to one year, he maintained.
IDLC was the top profit-maker in the non-bank financial institution (NBFI) industry last year, while the difference in profitability between IDLC and the second highest profit-making company in the sector was huge, he said.
IDLC made a net profit of Tk170 crore in 2019, according to the company's annual statement. It paid Tk110 crore to the government exchequer last year.
IDLC has been competing with the banking sector and is now among top 10 best performing banks in terms of profit, said Khan.
"We declared a 35% cash dividend for our shareholders last year, which was the highest in the financial sector, including banks," he said.
The government has capped the lending rate for banks at 9% to bring down the default loan ratio, but IDLC has been maintaining a merely 2-3% default loan ratio for the last five years even after lending at higher rates.
The average NPL ratio in the NBFI industry was above 9% in the last year, while that of the banking sector was above 10%.
Now the question is: How is IDLC doing good business maintaining a low default loan ratio even after lending at over 10-12% interest rates?
Arif Khan who spent 20 years of his 30-year career with IDLC said, "High interest is not the main reason behind NPLs [nonperforming loans]. A lack of good governance is what chiefly gives rise to NPLs."
The wrong choices of borrowers and intentional lending cause high default loans, he added.
Arif Khan joined IDLC as an assistant manager and was promoted to DMD before joining the Bangladesh Securities and Exchange Commission (BSEC) as a commissioner in the year 2011. After serving the BSEC for five years, he returned to IDLC as its managing director.
During his tenure in the BSEC, he played a key role in the demutualisation of the Dhaka Stock Exchange, the formulation of alternative investment rules and the amendment of the Corporate Governance Guidelines.
Khan said poor governance is triggered from two places – one is the board and the other is upper management of a company. The amount of NPLs goes up when both parties collude with each other in wrongdoing, he observed.
While some banks and NBFIs have collapsed due to various scams, many others have been doing well by ensuring regulatory compliance...Either the managing directors or board directors of the scam-hit institutions were found to be involved with the irregularities
"While some banks and NBFIs have collapsed due to various scams, many others have been doing well by ensuring regulatory compliance," he noted, adding that either the managing directors or board directors of the scam-hit institutions were found to be involved with the irregularities.
"If businessmen could not do businesses taking out loans at higher interest rates, they would not borrow money from us," he added.
The average loan growth of IDLC is above 14% and it never dropped below 10%, he said.
Khan mentioned a lack of efficiency in money management as the second reason behind high numbers of NPLs. "The team has to be competent. But most organisations do not have efficient manpower due to unfair hiring practices," he said.
He added, "Recruiting the right kind of people is very important for a financial institution, which IDLC strictly follows."
The third reason behind high NPLs is a lack of delegation, according to Khan.
"If the managing director approves all loans there are chances of mistakes. In the case of large banks, there are two to three authorised persons for approving loans," he pointed out.
If the managing director approves all loans there are chances of mistakes. In the case of large banks, there are two to three authorised persons for approving loans
While the NBFI industry has been suffering from a liquidity crunch in the wake of a loss of trust among depositors because of the liquidation of People's Leasing and serious loan scams at different NBFIs – including BIFC, International Leasing and FAS Finance – IDLC has been floating on excess liquidity.
He said IDLC has not ever faced a deposit crisis – even when the entire money market was going through a liquidity crisis. The company has cut its deposit rate down to 5.75% recently from above 6% as it has huge excess liquidity, he said.
IDLC saw above 7% growth in deposits last year when the NBFI industry was in de-growth following the bankruptcy of Peoples' Leasing.
The total deposits of IDLC stood at Tk7,790 crores in December last year, which was higher than many banks and around 19% of total deposits in the NBFI industry.
The total loan portfolio of IDLC stood at Tk9,234 crores at the end of December last year, according to the annual statement of the company.
It is only a good reputation that encourages depositors to park their money in IDLC, said Khan.
No scam has taken place at IDLC in the last 20 years, he said, adding that the right selection of managing directors has also helped the company build a good reputation. All the managing directors of IDLC are well reputed in the industry, he maintained.
No scam has taken place at IDLC in the last 20 years. The right selection of managing directors has also helped the company build a good reputation.
He went on to say that a managing director plays a key role in driving the organisation. However, in recent corporate culture, most managing directors work to retain their position by carrying out just the orders of the board of directors.
Khan, who loves to travel, listen to music and read books during his leisure time, is very strict and vocal in his leadership position. He is the father of two children – one son and one daughter – and loves to play with children.
Mentioning that all the NBFIs and banks that have collapsed faced their fate due to a lack of efficiency on the part of their managing directors, he suggested the top executives not bow down before their board members and instead apply their full authority to run their organisations.
What challenges does IDLC expect in the coming years?
The big challenge for IDLC this year is to retain loan growth, as there is a lack of demand for loans, said Khan.
IDLC mainly focuses on small and medium enterprises (SMEs), which are the hardest-hit by the pandemic and have been recovering slowly since the reopening of the economy.
Another big challenge is to collect loan instalments, he said. In normal times, regular collection is around 90%, but it dropped to 30% in April, after the outbreak of Covid-19.
However, the collection has started to recover gradually and now it has improved to 80%, Khan mentioned.
The next challenge awaiting IDLC is the yearly management of the cost of Tk200 crore, as its business has come down to almost half, according to Arif Khan.
IDLC sees the losses in this emergency situation as a part of business. It was a big challenge for IDLC to keep up the morale of its employees
In the banking industry, some banks have cut staff salaries to reduce expenses, but IDLC did not go that way.
"IDLC sees the losses in this emergency situation as a part of business," he said, adding, "It was a big challenge for IDLC to keep up the morale of its employees."
What is IDLC looking forward to?
Not profit-making – survival is the highest priority for IDLC this year, said Khan.
He said IDLC made over Tk700 crore in profit in the last five years. So, this year IDLC wants to stand beside the borrowers helping them recover, even by compromising on profit.
IDLC provided a waiver from installments to many borrowers considering their business situations.
The company is now focusing on reducing management expenses by adopting a remote work culture. Currently, 25% of its 1,300 employees are working from their homes, which is helping the company save on costs, he said.
The company is now focusing on reducing management expenses by adopting a remote work culture. Currently, 25% of its 1,300 employees are working from their homes, which is helping the company save on costs
IDLC is working on product diversification. An affordable housing finance scheme is their new product, under which IDLC wants to give low-income people access to house financing, said Khan.
IDLC has introduced a venture capital fund worth Tk45 crore to invest in technology-based startup projects for promoting youth entrepreneurship.
Under the fund titled IDLC Venture Capital Fund 1, the company has already selected three startup companies.