Banks or fund managers? – Journal


Imagine yourself as the CEO of one of the Big Five Commercial Banks. You have never worked in Pakistan before and have had a successful international career in several countries.

You’ve been drawn to because of aging parents and / or you want your children to grow up in the land of the pure. The fact that your overall package is around $ 1 million in a country like Pakistan is just a small detail. Before returning to Pakistan, you defined your ambition to create a world-class bank. Your research has indicated that the industry is very profitable, that dividends are paid out every year, and that the global mortgage crisis has left the industry unscathed given its low exposure.

In the process, your CFO to give you your first briefing. Radiant with confidence, she shows you a chart that shows exceptional year-over-year after-tax profit growth. It also reveals that the bank declares dividends every year, has great liquidity, and its non-performing loans are covered. It also draws your attention to the various prizes the bank has received and the charities it supports. The capital adequacy is strong and the future looks bright. It seems that it will take special skills to get out of this great path.

Bank CEOs should inform their boards of directors about structural imbalances in the banking sector

Your training taught you how to peel the onion. So you ask questions about the distribution of the loan portfolio. She smugly replies that the bank is largely risk-free. Up to 52% of your portfolio is invested in government risk-free treasury bills and Pakistani investment bonds (GDP). In addition, an additional 15% are loans backed by government guarantees.

Thus, 67% of your portfolio goes to the government in Karachi at the interbank offered rate (Kibor) plus and does not attract capital. Only 33% of your advances go to the private sector, including 25% to large industries. Loans to small and medium-sized enterprises (SMEs), consumer loans and mortgage financing are virtually non-existent.

Best of all, public loans grew 16% per year, while private sector loans grew only 6% per year. It seems to you that banks are acting more like fund managers.

By digging deeper, you are asking for the cost associated with cash profits. You are shocked to learn that less than 10% of the bank’s expenses support 50% of your net income from funds. This implies a structural imbalance between your income and the associated costs.

You ask your CFO: What will happen to the bank if the government finds a way to raise funds directly from the public while bypassing the banks? Or if the government decides to pay less than the money market rate according to global practice? You get a blank stare. It seems the CFO never acted for this scenario.

You come to the conclusion that you are sitting on a ticking time bomb and decide to go to your board to mitigate this doomsday scenario. After all, you came back to run a bank, not a fund.

Considering the extremely low returns of large companies, you decide to focus on agriculture, SMEs and social housing. You reject the Million Dollar Consultant Study and Fear of Failure (FOMO) -based ambition to apply for a digital bank (because you see no path to profitability).

On the agricultural front, your ambition is to create 1 million farmers within three years. You decide to target farmers with farms of less than two acres. You decide not only to lend, but also to provide end-to-end services. It means improving returns, not just funding. You decide to focus on selecting crops based on soil quality, genuine seeds, fertilizers, and pesticides, and offer to purchase the crop in advance by funding dry and cold warehouses.

To alleviate your bad debts, you decide to lend against gold ornaments. Rather than building everything in-house, you partner with agro-tech companies (selection of land and inputs), the microfinance industry for loan origination and collection, and companies for end-user purchases. .

On the SME side, your ambition is the S of the SME. You set yourself an ambition of 1 million customers and target kiryana stores. You scale up your merchant acquisition program and acquire a million merchants largely through QR codes and point-of-sale machines for large merchants. Your program allows for a 50pc line of credit against digital acceptance. You also provide funds for the purchase of merchandise from Consumer Staples (FMCG) companies. Your program is a cash loan and no collateral. Again, you’re partnering with fintechs and FMCGs. You benefit from the central bank’s first loss facility to mitigate your potential loss.

On the housing side, you partner with microfinance institutions for origination and collection. You convince the central bank to drop the perfect mortgage requirement for loans under 1 million rupees.

Bank CEOs need to convince their boards of the dangers of existing structural imbalances and remind them that banks’ business is to take calculated risks.

The writer is a tech entrepreneur

Posted in Dawn, The Business and Finance Weekly, May 31, 2021

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