Patience key to success for new banks

A bank is a business that is passed down through the generations, paying dividends along the years, much like the goose that laid golden eggs.

Also, the business of banking is quite unique, compared to other industries in manufacturing or trading. Earning the confidence and trust of clients, both depositors and borrowers, is vital to its sustenance. Moreover, a bank cannot cease to exist in the blink of an eye unlike other privately-owned business houses because of various regulations and compliance issues.

These are the views of Muklesur Rahman, chief executive officer and managing director of NRB Bank, a newly established financial institution.

Citibank was founded in 1812 and is still doing business around the world. Standard Chartered Bank began its operations in Bangladesh more than 100 years ago. Rahman said he can name many banks that have been doing business for generations.

“It is not a manufacturing business that you make products, sell those and book profits without taking so much time,” Rahman said in an interview with The Daily Star.

According to him, it takes three to five years for a bank to make profits; to make it a sustainable institution requires far more time.

“Sponsors of a bank have to have the patience not to pocket quick benefits,” he said, referring to some new banks that are charging ahead by issuing big loans to earn quick profits. But these, he said, may end up as bad loans, damaging the health of the new banks.

Rahman was surprised to see that some of these new banks rolled out Tk 2,000 crore as loans in the first year of inception, and that too in the year 2013-14 when the country was going through political turmoil.

Rahman made the observations on the challenges and outlook of the banking industry in Bangladesh based on his three decades of experience in foreign and private banks, at home and abroad.

Prior to joining NRB Bank, he was the deputy managing director at Eastern Bank. He also worked in Standard Chartered Bank and Citibank and a number of local private banks.

Banks run on depositors' money and the business is all about creating an enduring relationship with clients, both borrowers and depositors. Though entrepreneurs have created the fourth-generation new banks, each with Tk 400 crore as paid-up capital, it is insignificant against the depositors' money in the bank.

According to him, each of the nine new banks has already received several times more money from the depositors than their paid-up capital.

“Only one bad loan can intoxicate a bank's entire portfolio, making the business risky for entrepreneurs, shareholders and depositors.”

A bank's health depends largely on portfolio management and asset quality, he said.

“I will not go for short-term profits. I want to make NRB Bank a strong institution based on long-term business prospects.”

To him, lending is the biggest challenge for a new bank, as borrowers demand the lowest interest rate without considering the banks' cost of funds.

The new banks' data shows the cost of their funds is between 10 percent and 11 percent, which is well within a single digit for many old banks. In terms of lending, if a new bank offers a borrower 11 percent, an old bank offers 10.5 percent.

The banker said Bangladesh is a country of immense potential with around five crore youths who can be converted into human capital.

Promoting and facilitating small and medium enterprises is the only option that can benefit both the youth and the overall economy, he added. Citing examples from China, Malaysia, Taiwan, Hong Kong and Singapore, he said they became rich by developing their SMEs.

Rahman said SMEs will generate much needed employment and push the country's GDP onto a higher growth path.

“Banks need to lend more to the SMEs.”

On how banks can engage more with the SMEs, he said some banks can be given licences with a condition that they must work outside Dhaka. For example, a bank will work in Comilla only, another in Chittagong or any other major city, to reach out to the unbanked, but potential SMEs, he added. He believes that a bank should lend by seeing the borrowers, not their collateral.

He is of the view that some banks should be headquartered outside Dhaka, with maybe a liaison office in the capital to communicate with the regulator and government agencies.

On the challenges facing the sector, Rahman said political uncertainty, infrastructure constraints and high cost of funds are the main barriers for the banks.

“Banks face difficulties in getting back their loans when there is political instability in the country,” he said, referring to the rising nonperforming loans (NPL) during political unrest.

The industry's NPL reached Tk 28,000 crore or 12.79 percent of total loans as of September last year, while the internationally accepted tolerable NPL limit is 2-3 percent, he said.

Infrastructure dearth also pushes the cost of doing business up for the borrowers; Bangladeshi apparel entrepreneurs are doing a fantastic job competing with other countries, but adequate infrastructure could give them an edge over their competitors.

On the pricing of banking products, particularly loan and deposit products, the banker said the spread should never go beyond 5 percent. He hails the latest government move to cut the interest rates on savings certificates, which he believes will help banks reduce their lending rates.

A high corporate tax (42.5 percent) is another barrier for the banks, especially new banks, said Rahman. Many industries get a tax holiday, but not banks, he added.

Finally, he appreciates Bangladesh Bank for its efforts to regulate the sector strongly. The central bank has done a lot of good things, including automation and introduction of e-banking across the country, he said.