High operating costs, deployment of more people, unsecured nature of the loan, credit assessment, verification process, documentations and collection of loan, all made SME and retail loans expensive for banks
We will be happy to give Tk100 crore in loan to Square Group or any other good corporate client at 9 percent interest rather than lending the same amount to a few thousands of small borrowers. One or two relationship managers are enough to manage the group's loan, whereas we need at least 200 people for managing the same loan portfolio to many small enterprises.
This is how a senior official of BRAC Bank, known as SME lender in the country, reacted to the government's and the Bangladesh Bank's move to impose 9 percent interest for lending to all sectors except credit card from April 1 this year.
The Business Standard has talked to a dozen of bankers – from SME and retail heads to chief executive officers – who came up with a conclusion that access to finance for small enterprises and individuals will further be restricted for the move.
Accordingly, many of the small enterprises may go back to the predatory traditional borrowers, no matter how high the interest rate is, to meet their financial needs.
"It is not possible for banks to lend retail and small borrowers at 9 percent. We have already informed our opinion to the Bangladesh Bank," said Ali Reza Iftekhar, chairman of the Association of Bankers Bangladesh, a forum of private banks' managing directors.
BRAC Bank will be hit hard as its loan portfolio to small and medium enterprises is 45 percent or Tk12,000 crore of its total loan. In recent years, the bank has also strengthened its foothold in the retail segment that now stands at 18 percent of its total loan. So, the bank has to deploy more people than any other bank to run its business.
"We will not be able to lend at this rate. Our business to cottage and small enterprises will not be commercially viable," said Selim RF Hussain, managing director of BRAC Bank, which has been growing constantly despite deteriorating conditions of many banks in the country.
The bank's performance is also evident in the stock market. A share of BRAC was traded at Tk47 on Sunday, while many banks' share prices nosedived to below their face value because of their declining business and a rise in nonperforming loans.
Why are banks concerned with the capping of SME and retail loan at 9 percent, but not with corporate and commercial lending, which account for the lion's share of the industry's total loan?
Zahid Hussain, former lead economist of the World Bank's Dhaka office, said interest rates charged to cottage, micro and small industries are on an average 70 percent higher than the corporate and commercial lending rates in India, Malaysia and Thailand.
High operating costs, deployment of more people, unsecured nature of the loan, credit assessment, verification process, documentations and collection of loan, all made SME and retail loans expensive for banks.
For example, City Bank that is going big with retail loan has to spend 2 percent of a retail loan in acquisition costs that include staff salaries and commission. Another 2 percent the bank has to spend for credit assessment, verification, documentation, disbursement and collection. Costs for deposits will be added to these expenses in fixing the price of a loan product.
In addition, a bank has to keep aside 5 percent of a personal loan in provision. Banks have to maintain just 1 percent provision for SME loans.
"Why would you go to SMEs and individual consumers for giving loans at 9 percent when you can get guaranteed 8 to 8.5 percent return by investing in government bonds and bills?" questioned Naser Ejaj Bijoy, chief executive officer of Standard Chartered Bank, Bangladesh.
He gave an example that a relationship manager in his bank is capable of handling a Tk500 crore loan to a corporate group, while they need 500 men to manage the same loan to SMEs and the retail sector.
SME loans become costly because of its high operating expenses and its chances to end up in bad loans, he noted.
Rahel Ahmed, managing director of Prime Bank, said cost-to-income ratio for a bank on the SME loan is 80 to 85 percent, significantly higher than around 50 percent for other loans. The ratio means a bank has to spend Tk80-85 for an operating income of Tk100.
"Cost reduction is a way out, but it cannot happen overnight," said Ahmed sensing that loan growth to SMEs and the retail sector will decline in the months to come.
Bankers said a cut in the flow of loan to small and medium enterprises and prospective individual consumers may also hurt the real economy as less credit may lead to lower consumption and a deceleration in industrial activities, which can further affect employment generation and the government's tax earnings.
According to a BRAC Bank study, cottage, micro and small enterprises in Bangladesh have provided jobs for nearly 80 lakh people, and over 12,000 bankers support these customers. So, a turmoil in these areas could affect employment, bankers said.