Shamim Al Mamun elucidates the future of the NBFI sector and iterates LankaBangla’s dedication to its consumers through robust innovation.
Since the pandemic’s fallout, the government has provided numerous incentives, including stimulus funds and relaxing loan restructuring policy for the NBFI sector. How have the initiatives helped in overcoming the adverse impacts of COVID-19?
Likewise developed countries, Bangladesh Government has taken numerous steps to overcome any negative economic impact of the pandemic including: declaring loan based stimulus fund for export oriented, large and CMSME sector, reduction of AD ratio, bank rate, repo rate and CRR rate, waiver of interest on loans for 2 months, moratorium on loan payments up to December 31, 2020 etc. Although most of the incentives have been designed for banks, NBFI sector also get some benefits from those initiatives like: quota of 1,000 crore from CMSME sector and of 1,500 crore from large sector’s stimulus package, reduction of CRR from 2.5% to 1.5%, moratorium on loan payments up to December 31, 2020. These initiatives have helped the NBFI sector to some extent. As on June 30, 2020 private advance portfolio of NBFI sector stands at 567.51 bn which was 575.55 bn as on December 31, 2019, a negative growth of 1.4% against banking sector positive private sector credit growth of 4.19% in first half of 2020. The apparent problem of liquidity dryness for the NBFI sector has not been solved that much round the year.
Nevertheless, the whole economy has benefited from government initiatives. Despite COVID-19, major economic indicators of inflation, exchange rate, GDP growth, export and remittance growth, reserve money etc. are rising well.
What are the challenges that the NBFI sector faces in terms of competition against the banks? What can be done to overcome them?
From the experience of other countries, Bank and NBFIs have different lines of business and do not compete with each other rather work as supplementary institutes. Usually bank finances for short term tenure and NBFI finances for long term tenure and bank is dependent on public deposit especially for short to medium term while NBFI takes long term fund at reasonable rate especially from bond market.
As scope of business for banks and NBFIs are almost the same in Bangladesh, competitions are fierce although the strength of banks and NBFIs are totally different. Usually the cost of fund of NBFI is higher than bank as NBFI has to collect public deposits at a higher rate than bank and a sizeable funding of NBFI comes from Bank at a high rate. Due to this, the lending rate offered by NBFI is also higher than in banks. Higher lending rates discourage good customers to take borrowing from NBFI. Therefore, NBFI is experiencing increasing NPL day by day. To solve this problem, the cost of fund of NBFI must be reduced so that lending rate of NBFI comes closer to the rate offered by banks.
Bond market development is inevitable for survival and sustainable growth for NBFIs as this is the only long term source for NBFI that is less costly. Classic example is NBFCs of India who source their major fund from bond market and cost of bond is less than the public deposit.
Investing in CMSMEs (cottage, micro, small and medium enterprises) is still considered a high-risk endeavor in our economy. How much does LankaBangla prioritize CMSME investment? Do you have any programs to assist CMSME clients?
The CMSMEs being high risk has multiple dimensions, it depends from which point of view you are judging CMSMEs. If one sees exposure to a CMSME customer as a standalone investment, it is highly risky. But if you see it from a portfolio perspective, given proper risk management practices are in place it can be a pretty diversified investment as a large number of the borrowers from various sectors and geographic regions yields substantial diversification benefit which in turn reduce risk in portfolio level. Also, from the perspective of liquidity management, the CMSMEs can be considered as a well-diversified laddered portfolio of loans that has a high certainty of cash flow with very low concentration risk. In aggregate this business model with high risk-adjusted return, exposure to CMSMEs can be considered as a sound investment strategy.
At LankaBangla we are increasing our exposure to CMSMEs as a prioritized strategic agenda; we have proper infrastructures, product, people, and processes in place to increase our CMSME portfolio aggressively. Coming days, we will increase our touch point across the country to cater to CMSME specially Cottage and Micro segments. We have a special program named “SHIKHA” designed for women entrepreneurs in CMSME segments which offers both loan and deposit products to women entrepreneurs. Under loan products, women entrepreneurs are getting loans on relatively easy terms and under deposit products, women are getting higher rates than normal deposit customers.
How crucial are the adaptation and implementation of fintech in the NBFI sector? Can you please share some of the fintech solutions that LankaBangla has implemented?
Going forward Fintech solutions will be the critical success factor for an NBFI to survive as well as to maintain a sustainable growth as we will see massive technological evolution in next few years. As such, many of the businesses of banks and NBFIs will be taken over by Fintech based institutions in coming days. Moreover, the use of Fintech helps a financial institution to scale up business, to serve customers better, to increase effectiveness and efficiency of business operations and thus increase the bottom line.
At LankaBangla, we are in the process of implementing many fintech solutions. We are about to launch an AI based chatbot which will give customers instant service round the clock from anywhere in the world. We are in the process of implementing a digital wallet for our customers whereby our customers can transfer their funds in the digital wallet from any bank or credit card and pay any dues of LankaBangla or any DPS payment or even can place a deposit. We are also working on online approval systems whereby an application for any consumer loan will be approved by the system at the quickest possible time by using machine algorithms and big data. We are also thinking to exploit block chain technology for fostering our supply chain financing business. Besides these we have already made tie up with most of the digital payment solution providers so that our customers can pay at their convenience. We have already transformed our credit card software and implemented TranzWare which will help the Company to capture Big Data and serve the customers in a better way with the right products and services.
How can the use of technologies such as Big Data, IoT, and AI change the way NBFI(s) operate? How soon can our NBFI sector adopt these technologies?
Very timely question indeed. Like I said earlier, using of Fintech solution will be the Critical Success Factor for any financial institution in the near future to stay in business with sustainable growth. These three tools (Big Data, IoT and AI) are interrelated and these can give any financial institution an extra mileage over its peer organizations. NBFIs that are dealing or wants to deal with mass consumer and SME clients will be benefited by exploiting these tools. These tools will help a financial institution to understand the behavior and trend of consumers and thus the Company can offer the right products and services to cater the needs of consumers. Moreover, these tools will also help to render superior customer service and to help risk management including determining credit score of an applicant automatically, detection of fraud and error, helping clients not to go beyond their credit limit etc.
It will take time for NBFI sector to adopt those technologies in large due to the necessity of huge capital investment and requirement for individual Company specially for those NBFIs who are not dealing with consumer and SME business by that much.
However, at the Company level, few NBFIs may adopt these soon. LankaBangla will plausibly be the first NBFI who will adopt all of these technologies as we are the only credit card issuer NBFI in Bangladesh and we firmly believe exploitation of these technologies will give us an extra boost in our consumer business especially in the credit card segment.
What are the legal and regulatory challenges that remain for the NBFI sector? What kind of government support is the industry seeking to overcome the hurdles?
Legal and regulatory challenges of an NBFI is the limitation in its scope. Like I said earlier NBFI has to compete with banks on an uneven field as NBFI cannot do many things on its own. There should be a separate line of business for banks and NBFIs or NBFI should have the same scope of work like banks. Otherwise, NBFI cannot sustain for a long run and aim towards sustainable growth.
Policy changes are the main support that is needed for NBFI to remain afloat. Beside that development of vibrant bond market by overcoming all existing hurdles is another support government can do for NBFI.
Can you elaborate on the two deposit schemes Swasti and Protiva, that LankaBangla has launched with life insurance coverage? What are the objectives behind these two schemes? Please highlight the benefit of the schemes for customers?
Swasti and Protiva are kind of Bancassurance product where the customers will get life insurance coverage without paying any premium. The objective of these two products are to take care of our customers and their beloved families in the event of any unhappy event. LankaBangla will pay all the premium to insurance companies on behalf of customers.
“SWASTI” is a unique savings plan with dual benefit for customers. Under this scheme nominee(s) will be eligible to get full maturity value in case of death or permanent disability (accidental) of the Account Holder at any time for any reason (including COVID-19).
“Protiva” is for the new generation to explore new horizons. It is a specialized deposit scheme with life insurance (including COVID-19) coverage free of cost. The minor account holder under this scheme will be eligible to get full maturity value in case of death or permanent disability (accidental) of the legal guardian at any time for any reason.
We encourage customers to take these schemes as it will give them free life insurance coverage and will give their family a financial support in the event of any unprecedented accident.