‘Banks face new reality in continuing retail business at 9% lending rate’

While banks were expanding their retail business with rising economic capacity of the people, the imposition of the lending rate cap hobbled the business as it is difficult for banks to continue lending at 9% interest rate, said Mashrur Arefin, managing director of City Bank. In an interview with The Business Standard, he talked about the overall situation of retail business in the banking industry and the challenges they are facing during the lending rate cap regime. 

The Business Standard (TBS): What is the trend in the retail business of the banking sector in recent years? How have Covid-19 and the lending rate cap impacted this business?

Mashrur Arefin: Before we talk about the trend, let's talk about the core concept of retail business first. The concept is to create "transactional value" for your customers so that they choose you from among others by appreciating the values of the transaction you are offering them. The whole idea is to attract as many eligible people as possible to your bank so that deposit never becomes an issue for you. And then, on top of that, you can also give retail loans to these same groups of people. Retail deposit is a bank's primary lifeline, whereas retail level shopping transactions are so crucial for the growth of an economy. I mean, an increased volume of retail loans in the country leads towards more consumption and, in turn, economic growth. No doubt, it also enhances people's lifestyle, which in turn reflects upon the country's long-term social progress. 

All these trends are visible in the market now, both in deposit collection and loan writing areas. Our middle-income group is growing significantly, and on top of that banks are reaching out to the lower income groups also for mainly deposits. They are doing that through their agent banking channels. They are doing that by completing the "digital overhauling" of their retail business architecture. 

That's on the trend side. Now, let's come to the Covid-19 and lending rate impact question. The country's retail loan outstanding was around Tk56,600 crore at the start of the year, i.e. about 5.2% of total credit. For the last few years, the demand for retail credits was increasing as the lifestyle of people was changing. New banks also were coming into this area. The Covid-19 outbreak in March halted all such growths of all banks including ours. Then from April came the new lending rate of 9%, which made us face a new reality altogether.

We the major retail lenders have together done a cost calculation of doing retail loans. Two cost scenarios are there. First, where the general provision (GP) cost is 1%, (e.g. home loan), the cost comes to a minimum of 11.37%. But it comes to 15.37% where GP cost is 5% (e.g. personal loan). So, you see it's difficult to give retail loans at a 9% interest rate where your cost is either 11.37% or 15.37%. But we understand and appreciate the Hon'ble Prime Minister's ideas about inclusive growth. Therefore we are trying hard to bring down these costs so that retail lending at 9% remains possible and viable for us. It will take time. 

However, I am astonished to see how the situation is again improving fast. In 2018 and 2019, City Bank disbursed Tk140 crore in retail loans per month on an average. In January and February of this year, the average disbursement was Tk165 crore. Following the Covid-19 outbreak, it came down to only Tk36 crore per month in the March-June period. But it looks like we are back to normal in July, as we disbursed Tk120 crore in retail loans in that month. It indicates that both demand and supply are gradually getting normal. Riding on this hopeful trend, especially on the demand side, I am no longer getting worked up on the lending rate per se. I am instead trying my best to bring down the cost to make the 9% lending rate meaningful. Let the customers enjoy the fruits of retail loans at a lower cost, and let the larger socio-economic dreams of our Hon'ble PM get fulfilled. 

TBS: What are the challenges banks are facing in their retail business in the lending rate cap regime?

Mashrur Arefin: The main challenge is to bring down the cost of the deposit, and side by side the costs of administration. We are focusing first on reducing the cost of deposit through the acquisition of current and savings accounts (CASA) more. In the first seven months of 2020, we opened about one lakh CASA accounts. We achieved a CASA deposit growth of Tk1,522 crore during this period. The total deposit of the bank this year grew by Tk3,047 crore till July. That shows 50% of our new deposits are now coming in the form of low-cost CASA. That's how we are facing the retail lending cap challenge. Such growths in low-cost deposits during the Covid-19 situation clearly show that general people here do value, love and trust the City Bank brand, which is good news for a CEO.

TBS: What prospect do you see of consumer lending in the coming years?

Mashrur Arefin: Retail lending has to grow despite its higher acquisition and maintenance costs. Loan portfolio diversification is important. All eggs can go to one basket as long as individual eggs don't break and the eggs taste different. But that's not the reality. So, to counter the high NPL trend of large volume corporate and commercial lending, we must grow in retail, SME and cards lending too. I wish the general provision cost of all three retail loan products were brought down to 1%. The prospect would have been better and brighter then. 

Also, from the capital efficiency perspective, if retail loans are risk-weighted at 50% (at present, Home Loan is weighted at 50%, rest are at 100%), that would have forced the banks to see even brighter prospects for these products, given that nothing is more important than capital for us the poor bankers. 

TBS: How is City Bank adapting its business strategy to the changing business situation?

Mashrur Arefin: Our general strategy is to become a people's bank. Period. That means scaling up the business, the networks, the channels. We must bring in millions and millions of customers into our fold in order to maintain a stable deposit base first. Actually, our general strategy is the same as the government's financial inclusion strategy. Retail is a part of it, card is another where we are the market leader in credit cards, CMSME is another area where we are fast becoming big in the CMS (cottage, micro and small) side. Supply Chain Finance is another area where we must focus because everyone in this booming economy is either a supplier or a distributor of goods and services. 

Our strategy is also to maintain and uphold our leadership position in corporate lending, in smart treasury management and smooth foreign & local trade business. We are already big in these three areas. 

But how do we do all this? The answer is simple. Go digital. Don't just stop at automating things, but go full digital in each of the verticals mentioned above -- to bring down the cost base and, more importantly, to make the customer's banking business simpler, just home-based. Our recent launch of the country's first digital nano lending in partnership with bKash where the A to Z of all processes are all digital is a testament to the fact that we are seriously working. 

TBS: In the new budget, the government has set a target to improve private investment to 25% doubling the private sector credit growth from the current level. Do the macroeconomic targets match the reality of the liquidity position of banks? What is your observation?

Mashrur Arefin: Let's look at our fiscal targets first – 8.20% GDP growth and 5.40% inflation. This means our nominal GDP growth target is roughly 13.60%. On the other hand, as per Monetary Policy Statement (MPS), our private sector credit growth is 14.80% and Money Supply target is 15.60%. As of June 2020, our total private sector credit was Tk11 trillion for the whole industry, if I remember correctly. Now in order to grow at 14.80% rate, we will have to have loan growth of additional Tk1.62 trillion (Tk1,62,000 crore) in the private sector within the next one year. I am sure you understand how difficult and challenging a task that is, if not simply impossible. A major challenge, of course, is market liquidity. Another major challenge, of course, is credit demand. We all know that in March 2020, private sector credit growth was only 8.20%. 

However, somewhere deep down in my heart, I still believe that liquidity will not be an issue here even though a massive government borrowing (Tk85,000 crore) target has been set. Why? The government is getting lots of funds from abroad. Even today, I saw the ADB's commitment that they will give $11 billion to Bangladesh in the next three years. Many similar pieces of news have been published recently. Plus, the government's stimulus package-related support given to the market in the form of refinancing etc. will continue to keep the market liquid since I believe the government is planning on continuing to provide such stimulus supports for quite some time.

However, on the demand side, private sector credit may face major obstacles, mainly owing to Covid-19. No doubt, there is a huge slowdown of domestic as well as global demand for goods and services. Banks are also apprehensive about disbursing loans considering the general economic downturn and loan repayment challenges the customers are facing. But if there is a good Covid-19 vaccine available out there by January 2021 and if global recession suddenly does not unleash itself, I believe things will again be on course soon, albeit in a halting manner.