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Look beyond corporate clients

Prime Bank MD stresses need to divert resources to areas where return on investment is higher

Md Fazlur Rahman
Local banks should pay more attention to retail clients and small and medium enterprises for sustainable growth instead of relying on large corporate groups, a top banker said.
"We need to divert more resources to SMEs and retail banking where the return on investment is higher, even though the profit margin is lower. It will still be prudent capital allocation if we can do that," said Ehsan Khasru, managing director of Prime Bank Ltd.
“We have to go for it. Otherwise, banks will face sudden erosion in their capital if the large borrowers face difficulties in repaying loans," he told The Daily Star in an interview in Dhaka recently.
He said large industries account for more than 60 percent of loans in the banking sector, while the remaining goes to retail and SMEs.
" But the return on capital from the corporate clients is not at expected levels. On the other hand, whenever there is a crunch, it does not affect the SMEs and retail clients to a large extent."
"This does not mean that banks will not go for corporate banking. Of course, they will finance the large borrowers, but on the basis of risk adjustment and return on capital."
"Ultimately, banks will have to give value and safety and security to all stakeholders, including shareholders and depositors."
The managing director said his bank plans to expand operations in SMEs and retail banking.
Currently, Prime Bank's corporate loans account for 80 percent or Tk 11,000 crore of its total loan portfolio. The bank has given loans worth Tk 1,800 crore to the SME sector and Tk 1,200 crore to the retail sector.
He said corporate loans are the best
as long as the company performs well. "But if one company faces problems, the bank's foundation shakes."
He blamed ignorance on the banks' part for the sector's failure to go for substantial SME financing.
Khasru also pinpointed some problems in lending practices.
"In Bangladesh, a bank's relationship managers do not know where the loans are going. Whenever a relationship manager demands to know how the loan is being used, some borrowers not only decline to cooperate, but also say that they will not take loans in the future."
"So, our alternative is to lend to the SME and retail sector. The sector is huge but the size of the loan is not that high."
Khasru said implementation of the BASEL-II is now underway, and bankers would have to think beyond the box.
■ Banks take into account expected shocks while calculating risks. But they do not take unexpected events into account."
"Capital allocation should be done considering those unexpected factors."
The career banker said nonperforming loans have shot up from a single digit to double digits across the sector, which has hit profits hard.
He said the profitability of all banks would be affected this year because of the non-performing loans, as provisions that inflict losses on the banks are very high.
Prime Bank faced losses in the first
quarter in 2013, recorded a profit in the second quarter with some cumulative losses, and returned to black again in the third quarter.
"If the NPL factor remains static in the last quarter, Prime Bank will make good profits at the end of the year," said Khasru, who leads the bank to manage a fund of Tk 40,000 crore, Khasru said the future leaders in the banking sector would have to be experts on risk management. Otherwise, bankers would not be able to run the business successfully.
He said a number of scams in the banking sector have occurred. "It is not a problem of the system. It could not have taken place if there was no collusion between employees of an individual bank and their clients."
Khasru, who joined the bank in September 2011, said syndication loans, a growing practice in the country's banking sector, are also a part of risk management.
Prime Bank has recently arranged a syndication loan ofTk 396 crore, the biggest in the country’s history, to set up a ceramic tiles and sanitary-ware manufacturing project in Habiganj.
Khasru also blames unhealthy competition among banks who rush to net big clients in order to fatten their profit margin. He gave an example of a Chittagong-based corporate house that received financing from over 40 banks before becoming bankrupt.
"The client is now blaming the banks for giving excessive loans. So, bank leaders will have to introduce capital management, otherwise, the banks will face serious problems."
An MBA degree holder from Institute of Business Administration, Dhaka University, Khasru said the bank has received commitments for lending support from international organisations such as Asian Development Bank and International Finance Corporation.