Excess liquidity to make loans cheaper by January

Just a year back, liquidity crunch was the major area of concern for banks amid the pressure of implementing single-digit lending rate.

The coronavirus pandemic has reversed the situation as excess liquidity is now the main concern for banks and this is why loans will be cheaper next year.

Md Arfan Ali, president and managing director of Bank Asia, made the observation during an interview with The Business Standard on the occasion of the 21st anniversary of the bank.

"Borrowers will see the lending rate between 7 and 8% by January next year," he said.

Because excess liquidity is costly for banks, they will have to move for lending at cheaper rate to remain profitable, he explained.

Excess liquidity in the banking sector stood at Tk1.83 lakh crore as of October this year, which is the highest level in recent years.

 "It was presumed that the implementation of the single-digit lending rate would lead to efficiency, accountability and differentiate good and bad banks. But, now it is going beyond that because banks will have to lend even below 9% interests. This is the new reality that the pandemic has brought in.

"As liquidity is costly, banks will move to get borrowers and this competition will drive down the lending rate further," Ali said.

He pointed out that banks' cautious stance in lending during this critical situation coupled with borrowers' unwillingness to go for business expansion have caused surplus liquidity to balloon.

"But soon after the pandemic situation, there will be huge investment opportunities amid renewed enthusiasm among entrepreneurs and consumers as well.

Therefore, low-cost loans will be a great opportunity for borrowers to expand their business in the post-pandemic era," he observed.

The government implemented the single-digit lending rate on 1 April this year aiming to reduce defaulted loans by cutting down the borrowing cost.

However, borrowers could not enjoy the benefit of low-cost financing much as business expansion remained stagnant since the Covid-19 outbreak in March, pushing down the credit growth to between 8 and 9% during the period. As a result, liquidity in the banking sector has kept piling up.

When bankers are facing a tough time to do their job amid interference by directors and in some cases they are being forced to leave, Ali has remained with Bank Asia since his joining 21 years ago.

Sharing his long journey with the bank, he said it was possible because of good cooperation between the management and the board, and less interference by directors in managerial activities.

As a career baker, Ali follows Aditya Puri whom The Economist has termed as the best banker in the world recently.  Aditya's bank – HDFC Bank, India – is the model bank to Ali.

Aditya who retired from HDFC in October after serving the bank since its inception in 1994 and making the bank the world's tenth-most-valuable bank used to leave the office at 5.30 pm and loved to take his lunch with his wife at home.

Ali, who is now 53 years old, dreams to earn a good reputation for Bank Asia like HDFC by improving banking services.

Ali's daily routine is not much different from that of Aditya. Like his favourite banker, Ali loves to spend time with his family after office hours. However, he cannot end his office time by 5 pm which Aditya usually did.

Sharing his business plan, Ali said excess liquidity will make rural financing cheaper as well.

In view of the new reality, Bank Asia has adopted a new business model riding on agent banking – an alternative delivery channel – to spread business across the country, he added.

The bank has set its lending target through agent banking at Tk1,000 crore this year, as excess liquidity has reduced the cost for rural financing, he continued.

Bank Asia is the pioneer of agent banking in the country and came to profit for the first time last year in its five years of operation of the alternative delivery channel.

The bank has set its profit target from agent banking at Tk20 crore for this year, which was only Tk5 crore last year, said Ali.

The bank started planning to expand agent banking-driven business last year and the pandemic has helped to go a step forward.

The bank is now planning to extend agent banking services through a new concept "micro merchant", Ali said.

Micro merchants will work under agents in the village areas so that rural people can get banking services on their doorstep, he said.

Bank Asia has focused on agent banking as it has a bright prospect in near future, Ali said, adding that agent banking will bet mobile financial service soon, as this alternative service is getting popular fast which is reflected in the rising remittance disbursement through this channel.

Bangladesh is receiving a significantly large portion of remittance sent by its expatriate workers through agent banking. In September this year, the country received Tk38,335 crore in remittance, which is a 221% increase from Tk11,937 crore recorded in the same month last year, according to Bangladesh Bank data.

Agent banking, that provides limited scale banking and financial services to the mostly underserved population, is booming in Bangladesh.

The amount of deposits reached Tk13,040 crore in September this year, an increase by 111% compared to Tk6,170 crore recorded in the same month last year.

During the same period, the amount of disbursed loans reached Tk1,086 crore, a 255% increase from Tk306 crore recorded in September last year.

"People have to pay high charges for withdrawing money from mobile accounts and there are withdrawal limits, while cash withdrawal charge in agent banking is zero and there is no withdrawal limit as well," said Ali.

Bank Asia switched from mobile banking service to agent banking several years ago and is becoming successful by establishing a vast agent network across the country.

Now, the new concept – micro merchant – will work like agents of mobile financial service providers, Ali said.

As a result, the banking service will be accessible to the people of remote areas, he hoped.

"Bank Asia is now negotiating with the Bangladesh Bank to relax the mandatory single-digit lending rate for agent banking. This is because rural financing will be disbursed through agent banking, in which case micro finance institutions charge more than 20%.

"If such loans are disbursed through an agent banking network, the lending rate will be far less and that will lead to a win-win situation for both borrowers and lenders," said the Bank Asia president.

He maintained that the rural economy, especially the agriculture sector, is less affected by the pandemic. Moreover, remittance inflow has remained strong. As a result, the overall economy was not affected as much as those of the neighbouring countries. Therefore, the banking sector will not be much affected eventually.

But regulatory forbearance may be extended for less resilient businesses like small and medium enterprises, he opined.