Credit demand to surge to fund infrastructure projects

Liquidity management will be the major challenge for the banking sector in 2019 as credit demand from both public and private sectors will surge on the back of the ongoing mega projects, said a top banker.

“Banks have already started to face a huge liquidity pressure from the beginning of the year and it has been reflected in the rising deposit rate,” said Rahel Ahmed, managing director and CEO of Prime Bank.

The reversal in the liquidity situation came after it had eased for a couple of months at the later part of 2018 amid slowdown of investment on the occasion of the parliamentary election.

“The tight liquidity will push up the lending rate interrupting the private sector investment,” Ahmed told The Daily Star in an interview recently. 

The 47-year old previously worked at two large multinational banks in Bangladesh -- ANZ Grindlays Bank and Standard Chartered -- for more than a decade in various leadership roles.

He subsequently resided in Dubai for about seven years and worked for two large regional banks -- Emirates NBD Banking Group and First Gulf Bank. He helmed the top post of Prime Bank in December 2017.

He said some state-owned banks that mostly play the role of suppliers in the call money market started to borrow in January, which reflects that they are under liquidity pressure. “When state-owned banks come under liquidity pressure, it means that the overall market is in a tight money supply.”

He said non-performing loan (NPL) is a major factor behind the liquidity shortage.

“The ease of liquidity situation depends on the government's will on to what extent it will be stricter with the defaulters.”

The new finance minister has announced that default loans would not increase any longer and if it happens in reality by improving governance in the banking sector, the liquidity will ease up, he said.

“If the NPL can be controlled and no new loans become non-performing, then the market will not face any additional liquidity pressure.”

NPL totalled Tk 99,370 crore in September, which accounted for 11.45 percent of the total loans in the banking sector, according to Bangladesh Bank data.

The public sector expenditure will increase significantly in the infrastructure sector as many new projects are being approved and implementation of the ongoing mega projects will accelerate.

“Lots of infrastructure projects will be implemented which will require a huge financial support. A large portion of the financing will come from the banking sector, fuelling credit demand,” said the career banker. 

High interest rate on savings instruments is said to be another major cause behind the deposit crisis, but the banker disagrees.

He says the rate of savings instruments is not the factor; rather non-compliance of the investment rule is creating a problem in the market.

“Savings instruments aim to support senior citizens and there is a ceiling on investment. But in reality, many businessmen are investing in the instruments violating the limit and they invest in different names,” said Ahmed.

“If the investment rule is properly followed, liquidity will not flow to saving instruments. The central bank is working to develop a database on investors of savings instrument that will be helpful for proper application of the investment rule.”

According to the CEO, the banking sector needs a mega transformation to cope with the growing challenges of rising borrowing cost, slowdown in profit and deposit crisis.

The interest rate on deposit went past 9 percent in January.

Ahmed said when the country is marching towards becoming a middle-income country from the lower middle-income status, traditional banking model will no longer be effective.

In all other countries such as India, Singapore and Malaysia, the financial industry has transformed as their economies evolved.

“In Bangladesh, the banking sector will see such a transformation between 2019 and 2021 and banks that will bring changes to their operations and business model will survive in the race.”

Nowadays, digital transformation is common and the banking sector needs it right now, as there is no alternative to digitalisation for sustainable business, according to the banker. 

Prime Bank has also transformed its operations and business models into centralised system from the decentralised one.

“The transformation yielded many benefits for the bank such as better risk assessment, lower NPL and reduction in operational cost.”

The bank began transformation into centralisation model in 2015 and completed it in 2018.

“The NPL of the loans given during this transformation period was almost zero,” Ahmed said.

The banker also played a key role in the last three years in leading the “Business Model Restructuring and Centralisation” for Prime Bank.

Prime Bank saw moderate growth in NPL rate to 8.22 percent in September last year from 7.93 percent in December 2015, according to Bangladesh Bank data.

Ahmed took the charge of the bank at a time when the banking sector was going through a host of challenges amid uncertainty surrounding the national polls, slow business activities, and tight liquidity.

“Still, the bank fared well in the core banking business,” he added.   

Though the centralisation model helps the bank to curb loan scams, it has slowed retail customer service in some cases, he said. The bank is now examining the problems of post-centralisation system to improve the service.

The bank is also paying more attention to consumers and small and medium enterprises, thanks to the changing spending habit of customers.

“Prime Bank is trying to introduce a variety of products in line with the eco-system of young professional consumers. From this perspective, the bank is focusing on consumer and SMEs,” said Ahmed, who received an MBA from the Maastricht School of Business, Netherlands.

The bank's deposit was Tk 20,100 crore and the outstanding loans Tk 16,800 crore in September 2018, BB data showed.