No gains for financial sector with a slowing economy
The financial sector is likely to record underwhelming earnings for 2014 if the political situation does not improve soon, said the managing director of IPDC, a top non-bank financial institution.
As economic activities slow down, non-bank financial institutions (NBFIs) will see a decline in profits, Mominul Islam told The Daily Star in a recent interview.
The financial sector, both banks and NBFIs, has been experiencing a slowdown in loan repayments, as businesses struggle to operate normally, said Islam, the youngest managing director in the financial sector.
“In the last two years, banks and NBFIs struggled to retain their profits, but this year, we have seen the real economy being affected by the political impasse.”
The manufacturing and services sectors are being hit by the current political crisis, which is going to impact the banks and NBFIs, he said.
“So if there is a negative shock in the economy, the entire financial sector will definitely bleed for that,” he said. “We could survive in the face of the capital market and real estate bubble burst, but IPDC is going to be affected by an economic slowdown.”
IPDC, abbreviated for Industrial Promotion and Development Company of Bangladesh, is not trying to be aggressive in soliciting new financing as the market is slowing, he said.
“However, the slowdown is a temporary phenomenon and our economy is resilient and can bounce back.”
Business activities in the country will get a boost after the election, the MD said.
“We are more competitive in external trade as our export-import constitutes more than 50 percent of GDP, which is higher than India, Pakistan or Nepal.”
When exports and imports are high, it helps the banks and financial institutions to do business, he said. “We are expecting the economy to soon see an upward trend.”
In Bangladesh now, there are 31 NBFIs doing various types of businesses, including financing and capital market business. IPDC is a pioneer in leasing financing in Bangladesh.
“From the incubation period, the financial sector is moving to maturity. It has gone through many transformations.”
NBFIs have diversified their business models and products; the sector is now not only involved in lease financing, but it is also giving term-loans and syndicated loans, said the managing director.
Since 2006, most NBFIs are heavily involved in the capital market. “As we saw a capital market boom from 2006 to 2010, the profitability of many NBFIs jumped.”
Unfortunately, at the end of 2010, the bubble burst and most NBFIs are struggling to maintain profitability, he said. Institutional investors like banks and NBFIs did not behave like full-grown institutional investors, and as a result, individual investors were influenced by them, he added.
The position of institutional investors in the market should be based on company fundamentals like cash flow, future earnings and performance, he said.
“But what happened in our stockmarket is that they violated their investment limits. They focused on short term profits.”
“Their profits were not sustainable. You have increased your company's cost base but you certainly cannot limit your costs when profitability drops.”
Financial institutions should be cautions in the future about this sort of a phenomenon, he said.
“We should be concerned about the risk parameters in whatever business we are doing.”
There are a few financial institutions that have done well even in this challenging period as they have no involvement in the stockmarket and real estate, he said.
“We did not get involved in the speculative capital market although we make venture capital and preference share investment, which helped IPDC do better business in a challenging market.”
Among the NBFIs, IPDC saw the highest profit of Tk 7.13 crore in January-September, a 386.3 percent surge from the same time a year ago.
IPDC recorded a 30-35 percent growth in operating profits, while most NBFIs saw negative growth, he said.
“Whatever we have disbursed in loans, none are non-performing. We are continuously improving our asset quality,” he said.
On self-sufficiency, Islam would like NBFIs to move away from the bank borrowing model and initiate their own deposit making efforts.
“Almost all NBFIs depend on the money market and corporate borrowings to generate funds. As a result, when liquidity becomes tight, NBFIs suffer as their borrowing rates go up and funds become scarce.”
Many financial institutions learned lessons the hard way during recent stockmarket shocks and they are trying to increase their deposit base so that they do not have to rely on bank borrowing, he said.
Moreover, Islam deems the cost of funding for NBFIs in Bangladesh to be excessive.
“Banks are still charging NBFIs 17-18 percent, which is too high. That is why, at IPDC, I decided in 2006 to move away from this bank borrowing model and initiated our own deposit marketing efforts.”
IPDC become totally independent on its own sources of funds. “We are dependent on our customers' deposits.”
“Last year, there was a severe liquidity crisis in the market and banks raised the interest rate to 18 percent for NBFIs. We did not face a setback while many others struggled.”
When NBFIs borrow funds at 18 percent and lend out funds for 20-22 percent, it is difficult for borrowers to pay back loans, which increases non performing loans, he said.
