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October 26, 2019

Banks strategises new value propositions amid slowdown


October 26, 2019

KARACHI: Mehreen Ahmed is head of retail banking at Bank Alfalah. She talks about challenges and opportunities for the banking sector.

Q: Is economic slowdown hurting the banking sector?

A: In the last one year the government has taken various constructive measures in terms of documenting the economy, creating greater transparency and increasing accountability along with trying to put in place various countermeasures to ease the economy towards recovery. The banking industry is going through a challenging phase impacted by these changes on various fronts. The slowdown in business volumes has impacted the deposits business, while the interest rates’ hike has had an impact on the lending business. There is also a possibility of a parallel cash economy developing as depositors moved away from banks.

However, I think this is a temporary situation. Things are going to improve hopefully next year. On the positive front, the industry is adapting very quickly to these changing circumstances in order to stay relevant, by targeting newer customer segments, digitising product and service propositions, creating greater efficiency through automation of processes and utilising analytics to effectively target customers based on their needs.

We have made the right calls so far in terms of how the interest rate cycle has played out, and supplemented by volume growth, the results have been phenomenal and going forward, we are targeting to maintain this momentum. In terms of volume, Bank Alfalah has displayed one of the highest growths in current deposits till June 2019 as well as maintained the highest loan to deposit ratio in the market which is a testament to its commitment in playing a significant role as financial intermediaries for businesses and hence, contributing to the economic development of the country.

Q: Will continual cycle of monetary tightening lead to higher defaults in near future?

A: An increasing interest rate environment generally affects the repayment capacity of the borrowers. However, this does not mean that these stresses will result in higher defaults in future. Bank Alfalah’s non-performing loans are well-managed and its asset quality remains broadly resilient. Since the last credit cycle, the bank has deployed stronger portfolio monitoring tools along with proactive control measures resulting in being strongly placed in terms of being able to sustain portfolio strength.

Q: How do you see consumer financing at present and in next five years?

A: Although challenges like high interest rates, changing price dynamics in automobile industry, currency devaluation and a heavy documentation process for property have dampened appetite for consumer loans. I believe this situation is temporary as consumers will start adjusting to the regulations as well as the pricing, and once the economy recovers the demand for consumer products will regain momentum. The government is being a big support especially for mortgages and has taken various positive steps to bridge the gap between demand and supply through the creation of a special vehicle to promote low cost housing.

The way forward is digitisation on the solicitation process, automation of processes and using advanced analytics to target customers effectively and Bank Alfalah as well as the industry has started to make great strides in upgrading their systems in line with global best practices which is a very positive sign for the years to come. With the government focused on low cost housing and green energy– we are positive that consumer financing will evolve towards newer products and streams and will be able to reach out to a greater set of customers.

Q: Is the government’s target to raise share of small business loans to 17 percent of private sector’s credit in next five years achievable?

A: The small and medium enterprises’ financing target is doable, but again the prevalent monetary tightening could lead to a decline in the real economic activity. Furthermore, banks need to come up with a wide range of tailored solutions to make SMEs’ transactions smoother, faster and more convenient. The other challenge associated with SMEs lending is the state of the documentation process. There is a documentation required to be eligible for the SMEs’ loans, which many small and medium-sized firms lack. Moreover, the gap in SMEs’ accesses to finance between big and small cities has been seen as hurdle to raising greater awareness and converting the unbanked population.

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