Bangladesh+Bank_042016_0009

We are at the beginning of a retail boom on the lending side of our financial sector. Lenders are offering lucrative rates and minimal fees to attract their prospective clients. Some of them are desperate to take over the loans process from their peers. They are giving a Breakup Guide to the clients and alluring them to close account and switch over to other banks. In case of home loans, interest rate is one of the major tools to exert a pull on customers. There is a competition in the industry to trim down the home loan interest rate. Some of the lenders are offering much lower rates to draw new customers even as high rates prevail for existing customers. Moreover, some of them are charging higher interest rates after three or four months of disbursement of the loans.

On the other hand, customers are switching from their present lenders without knowing the ins and outs of alternative lenders. The biggest pain points for consumers switching banks are early adjustment fees, mortgage redemption fee, new mortgage fee, documentation fee and service charge/loan processing fee.

In the event of switching from one lender to another, clients are ultimately losing their bargaining power by sinking themselves under huge debt burdens over a period of time. For instance, a client is enjoying a home loan for Tk 5.00 million from a finance provider against a registered mortgage of his land and building valued at Tk 12.00 million. The client spent the loan amount for construction of his building and he is happy with his present finance provider. Then, the 2nd finance provider comes into the scene and offers Tk 10.00 million with a lower interest rate. Now, the client thinks if he gets an additional amount of Tk 5.00 million, he may change the fittings of his building and invest the rest of the money in the capital market to earn more money within the shortest possible time. Then he has his house vacated by notifying the tenants as he has to show some construction work to abide by the sanction terms of his new finance provider.

Over time, the client loses the maximum portion of his money in the capital market since he has no experience in handling the stock market. The client is facing the real music now, since he cannot manage the EMI (equal monthly installment) from the rental income as the EMI is also getting double with his new enhanced home loan. Meanwhile, another finance provider comes to the client and offers him Tk. 12.00 million by inflating the value of his land and building. Again, Mr. Client spends the additional amount of money for adjusting the existing loan with early adjustment fees, further mortgage cost and so forth. After servicing some of the EMIs of the new loan, the client begins to feel that he has no ability to repay the bank loan with interest. Now he wishes to settle the loan by selling the property as he cannot bear the burden at this point. At the stage of negotiating, the truth comes into the front that the actual market price of the property is lower than the loan he has already taken. It’s like a Venus fly trap. once anyone gets in, he will be stuck.

Financial marketers need to concentrate on those consumers who voluntarily decide to switch. According to a study by Market Force, a north American customer experience management (CXM) company, one in five banking customers are not satisfied with their relationship with their primary bank. The primary reasons cited centered on both dissatisfaction with fees and the service provided by the institution. The customers are fed up with paying interest/fees on their loan account and gaining little or no interest on their checking account. They want access to consumer-friendly technology and are looking to get all the services from a single point.

In this regard, the central bank has issued a circular from its Customer Services & Complaint Management Department and instructed the banks to serve notice by giving one month’s time to their clients who are enjoying term loan having floating rate of interest. The revised repayment schedule with up to date liability position of the respective client(s) shall have to be accompanied with the notice to be sent via e-mail or letter through mail/courier. The client is allowed to adjust the loan or investment in full without paying “Early Settlement Fee” or any additional fee within one month if s/he wants so in case of a rise in the rate of interest.

No “Early Settlement Fee” shall be imposed on any continuous or demand loan (or investment as referred to in Islamic banking terminology). In case of default installments, late payment fee/penal interest shall not be more than 2.00% above the prevailing rate of interest/profit applicable for respective loan/investment.

In another circular Bangladesh bank has issued directives to the scheduled banks regarding establishing regular monitoring and reporting systems, including borrower follow-up and mechanisms to ensure that loan proceeds are used for the stated purpose as declared at the time the loan application was made. The central bank also advised the scheduled banks on the need for a rationalization of fees and charges on Cottage, Micro, Small and Medium Enterprise (CMSME) and asked them not to charge early adjustment fees on the loans under this sector.

There are 56 banks and 33 FI’s playing in the financial market but the prudential regulations for banks and FI’s are not the same. The key retail banking products are creating huge confusion in customers’ minds as a lot of inequality prevails where rules and regulations of banks in comparison with those of FI’s are concerned.

 

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From the above comparison, it is clear that the regulations are in favor of NBFI’s over banks. The banks, on the other hand, have a much higher opportunity to expand retail business through branch network, doing trade finance business and access to checking accounts.

Sidelining the SME business, the lenders are attracting clients to consume as much as they can, by offering air tickets for best user of credit cards, stay and dine in five star hotels, low cost home loan, lucrative top up offers on personal loan and many more. Lower interest rates are being charged, ranging from 8.00% p.a. to 15.00% p.a. in case of Home Loans whereas in the SME sector those are a bit higher, ranging from 12.00% to 17.00% (other than women entrepreneurship loan). In the sense of productivity the SMEs deserve lower interest rates than Home Loans.

Currently, it is hard for people to make real income from interest against savings as the rate of interest for savers is reducing continuously. Nowadays people are discouraged to save since little or no interest on demand deposit and low-priced retail loans are leading them to spend first. As a result, the money market has become more liquid and the capital market is gaining momentum.

The heart of the problem is systematic mispricing, greed and unbound sales target. Eventually the finance providers are destroying the morale of customers while meeting their sales target. Aggressive sales target may lead the lender to an impulsive situation that will hamper the image of the institution as a whole. In the recent past, a USA-based bank (Wells Fargo) went through a scandal due to the creation of unauthorized accounts by the employees, under pressure to meet those sales targets. They created as many as 2 million fake checking and credit card accounts under the names of real consumers. Wells Fargo paid $185 million in fines to regulators and is facing investigations by the Securities and Exchange Commission, the US Justice Department and the state of California.

This sort of wrong doing will lead the economy to a financial crisis. The effects of the financial crisis in the western world in recent times are still being felt today. The financial crisis of 2007-2008 was the largest and most callous financial event since the Great Depression and exposed the weaknesses of the global financial system and reshaped the world of finance and investment banking. The underlying cause of the financial crisis was a combination of debt and mortgage-backed assets. Borrowers had little incentive to disclose information about their ability to pay.

There were hundreds of billions of dollars worth of mortgages given to individuals with poor credit ratings on adjustable rates. These mortgages typically required low interest payments (sub 8%) for the first 2 years, and then increased to 15% per year for the next 28 years. There was no way that these sub-prime borrowers would be able to afford the higher repayment rates. As house prices stopped rising and started to fall, homeowners could no longer refinance and remortgage their houses for cash and started to default.

The crisis was not felt by us, since our economy is not so big and not so integrated with the western world to catch the wave. Moreover, we have no financial products as the USA had. Our crisis will be different in nature. The market is not mature enough. We lack innovative products, IT infrastructure and sufficient skilled manpower. Widespread financial literacy, digital infrastructure, level playing field, strong monitoring and stringent guidelines may stave off a crisis. The banks/FIs have to focus on things like signing up new customers and keeping existing ones happy. They also have to prepare for digitalization of banking products and services. This is because in the near future digitalization will change traditional banking business model, in some cases radically. The good news is that there is plenty of upside awaiting those willing to embrace it. The bad news is that change is coming, whether or not the players are ready.

Md. Abdul Kaderworks for a private commercial bank.

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