Why is BRAC Bank hailed as one of the best banks in Bangladesh?
Among the 61 private, foreign, and state-owned banks operating here, a few stand out for their exceptional performance. However, these successful banks were once struggling. How did they manage this remarkable turnaround? Here is the last one of their stories in a three-part series.
Before BRAC Bank emerged in 2001, lending to cottage, micro, small, and medium enterprises (CMSMEs) in Bangladesh without collateral was virtually unheard of. Established banks predominantly catered to corporate and commercial sectors, neglecting the needs of smaller enterprises. BRAC Bank's approach to bridging this gap surprised many bankers.
In just a few years, BRAC Bank discovered that its founder, Sir Fazle Hasan Abed's vision to finance the unbanked population was highly effective. The bank quickly rose to prominence, becoming a leading and compliant player in Bangladesh's banking sector.
The bank achieved record net profits of over Tk827 crore in 2023, the highest ever made by any local bank, whether state-owned or private. Regarding deposit and loan portfolios, the bank trails only behind Islami Bank Bangladesh and Pubali Bank. As of 30 May this year, BRAC Bank's market capitalisation of Tk6,088 crore was the highest among all publicly listed banks.
Amid economic uncertainties, a dollar crisis, exchange rate fluctuations, and subdued demand due to persistent inflation, BRAC Bank's deposits surged by 34%, while loans expanded by 26% in 2023, a testament to customers' unwavering trust in the institution. The average growth in loans and deposits in the banking industry was less than 10%.
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Distinguished by its commitment to inclusive financing, BRAC Bank boasts a unique distinction as the sole lender in Bangladesh where CMSMEs constitute over 45% of its total loan portfolio. Also, at the close of 2023, the bank's CMSME loan outstanding reached Tk23,234 crore, with 85% being collateral-free, an unprecedented benchmark in the country's banking sector.
The bank also maintained a vigilant stance on risk management, evident in its non-performing loan (NPL) ratio of 3.38% last year, almost one-third of the industry's average. BRAC Bank consistently upholds a healthy NPL coverage ratio, safeguarding against potential credit shocks, which stood at 115% for 2023.
The bank performed well in other indicators, be it return on equity, loan recovery, capital to risk-weighted assets ratio, etc. But how was that possible?
BRAC Bank successfully onboarded 3.6 lakh new customers last year, when many out of 61 banks saw a decline in their new customers.
"If you can earn trust, new customers will come in and revenue and profits are natural consequences of that," Selim RF Hussain, managing director of BRAC Bank, told The Business Standard.
Dr. Mustafa K Mujeri, a noted economist and independent director of the bank, said that BRAC's operational model differs from traditional banks due to its commitment to financing unbanked SMEs.
"BRAC Bank's mission is not solely profit-driven; it also has social objectives," said Mujeri, who is also a former chief economist of the central bank and Director General of BIDS. Also, he credited the professional board of directors for their integrity, noting that, unlike privately-owned banks in Bangladesh, they have no personal interest in gaining from the bank.
BRAC Bank is now on such strong footing that it aims to become the largest lender within the next five years.
"We are confident that our bank's balance sheet will grow by 30% per year for the next half a decade and become the country's largest bank," Selim said.
Where does his confidence come from?
Primarily, a highly professional board of directors, strong corporate governance, transparency, compliance, values, and a balance between professionalism and sustainability are the key drivers behind the bank's rise, Selim said.
"Our board never dictates who will receive loans and under what conditions. The management does it by assessing borrowers' ability and willingness to repay, along with evaluating their characteristics," said the MD.
Throughout his eight-year tenure as the bank's top manager, Selim noted that the board refrained from intervening in loan extensions or recruitment processes, which is very rare in Bangladesh. "The board only wants to see the bank to be better and stronger," he said.
Also, he said that the bank's business model and diversity - from SMEs to retail, and corporate sectors - have positioned it as the country's strongest bank.
He said when BRAC Bank extends corporate lending to a company, it tries to provide employee banking services and cater to the supply chain needs of that company.
Muhammad A (Rumee) Ali, who served as the bank's chairman for nearly six years starting from 2007, said BRAC Bank's business model is very robust and also it is a value-based bank.
"While SME lending carries inherent risks, BRAC Bank works hard to make this lending safe," remarked Ali, also a former deputy governor at the Bangladesh Bank.
He said from the very beginning BRAC Bank had a focus on lending to micro and small enterprises and the unbanked population.
This business model has made BRAC Bank a solid lender, he said, adding that "Individual defaults on small loans do not significantly impact the bank's stability. However, defaults on single large loans can result in substantial losses."
In the annual report for 2023 released recently, Meheriar M Hasan, the chairperson of the bank, said the bank's remarkable growth in deposits and loans despite a year of uncertainty underscores the bank's unique identity and increased appeal to customers.
Unique loan portfolio
BRAC Bank distinguishes itself in the banking sector with a unique loan portfolio mix: 45% CMSME, 39% corporate, and 16% retail. This diversified combination boosts stability and resilience, positioning the bank on a solid financial foundation. The substantial CMSME portfolio, unparalleled in the banking industry, underscores the bank's dedication to grassroots entrepreneurs—the backbone of the economy, as affirmed by the bank's managing director.
BRAC Bank's collateral-free CMSME loan has become the first choice for SMEs entering the formal banking channel. With 60% of its CMSME loans penetrating rural areas, BRAC Bank is directly revitalising the rural economy and creating employment opportunities, he said.
The bank generated nearly Tk315 crore in operating profit from retail banking, Tk736 crore from corporate loans, and over Tk180 crore from its treasury division. This diverse range of income sources underscores BRAC Bank's strength and versatility in its loan portfolios.
Diversity in deposits
BRAC Bank's deposit mix is just the reverse of its loan portfolio. The bank's retail deposit portfolio is 51% of its total deposits at the close of the last year while corporate and SME deposits accounted for 30% and 17-18% respectively.
"This diversity in our deposits allows us to work in different sectors together," said Selim.
Although current and savings accounts deposits constituted 46% of the total deposit base, 5 percentage points down from the previous year, the bank still experienced an expansion in its low-cost fund base, said the CEO.
"We emphasise cost efficiency and have implemented efficient and effective cost management practices for long-term stability. We have reduced our cost-to-income ratio to 56% from 58%," he said.
Small is beautiful
The small business segment is the bank's largest segment as it represents 36% of the SME deposit portfolio and 72% of the SME loan portfolio. The bank utilises a wide network of 446 SME Unit offices with 3,000 dedicated resources to reach out in rural and semi-urban areas.
Selim RF Hussain said most of their over Tk20,000 crore SME loan portfolio is collateral-free and most of this loan ticket size is less than Tk20 lakh. Interestingly, NPL in this segment is less than 2%.
"Small borrowers always want to repay on time. They don't get defaulted wilfully," he said, adding that wilful defaulters take big-size loans and they live in posh areas in Dhaka.
Presently, 15 lakh SME customers are onboarded in BRAC Bank, which disbursed a total of Tk1.38 lakh crore as SME loans since its inception. Last year the bank earned nearly Tk957 crore as revenue from the SME division and contributed over Tk161 crore towards operating profit.
Board matters the most
In Bangladesh, it is often said that a bank's quality depends on its board of directors. Frequently, directors intervene in loan approvals and recruitment processes. Currently, many banks are controlled by single families, as the law permits up to four family members to serve as directors of a bank.
BRAC Bank is a prime example of how a professional board of directors can enhance and strengthen an institution. The bank's board comprises nine directors, including six independent members and three nominated by BRAC, the world's largest NGO. Currently, Meheriar M Hasan, a nominated director, serves as the chairperson of the bank. Before him, Ahsan H Mansur, executive director of PRI, chaired the bank as an independent director.
Distinct ownership stakes
As of April 30, approximately 80% of BRAC Bank's shares are owned by institutional investors, both local and foreign. BRAC (NGO) holds 46%, foreign investors own nearly 31%, local institutions hold nearly 17%, and the public owns 6.35%.
According to the bank's managing director, North American and European investors collectively own 36-37% of the stakes in BRAC Bank among foreign and institutional investors.
What next?
BRAC is an SME-focused bank, but the profitability from this segment is lesser than corporate and retail lending. Accordingly, the bank is trying to embrace technology to cut operating costs.
"Our entire SME loan processes will be automated by this year to reduce operating expenses," said Selim.
Currently, the bank prioritises differentiating customer experiences and developing data-driven decision-making and prediction models. Technology is being used for tailoring products and services to individual customer needs, moving away from the one-size-fits-all approach.
"Those days are not far off when our relationship managers will visit prospective clients and assess their creditworthiness on the spot," said Selim, CEO of the bank. "And if the client is eligible, they will receive the loan in his account within half an hour," he said.
