TOWARDS THE LEAD
MCB Venture In Consumer Financing
SADAF AURANGZAIB, Senior Correspondent
July 31 - Aug 06, 2006
In the midst of the growing industry of consumer financing where the market has shown a tendency of greater achievements, the apprehension about the likelihood of the rising interest rate in many of the products is taking its pace but the commercial banking side is quite diligent in taking up the growth to its maximum. One such institution is MCB Bank Limited. Owing to its largest network of more than 900 branches and a relationship of over 50 years with its customers, MCB clearly understands the needs and demands of the consumer finance market in the country. Realizing these needs MCB has introduced a wide range of financial products and services for consumer financing. We get the chance to talk to the head of Consumer Banking Division. Mehreen Ahmed is quite optimistic about the market attitudes towards consumer banking and is working hard to make all her ambitions possible.
PAGE: First tell us a little about yourself, how did you come across MCB?
MA: Well, I have been in banking now for the last eleven years. Before I was working for some other companies in the corporate sector, mainly my specialization was marketing. In 1995, I joined Standard Chartered Bank which is now the largest international bank in the country; I worked with them for almost ten and a half years in various positions starting from chronic management to head of risk for Pakistan and Sri Lanka which was my position when I left them so in a way I have a well rounded exposure to consumer banking and I have been through all the disciplines in my ten years. In the last year I was approached by MCB and I thought this as a great opportunity for me. It was a big challenge as MCB was looking to actually reshape and expand their consumer banking, that's how I came in.
PAGE: Tell us a little about Consumer Financing of MCB, how effective it is in terms of credit oriented activities?
MA: As far as credit oriented activities are concerned, we are catering to almost all kinds of loans and products. The only product we are not doing at this point in time is credit cards facility which is coming up for launch later this year. We have been involved in car loans, home loans, we give running finance facility against residential and commercial property to individuals for business purposes and recently we have launched personal loans so on the loan side we have a complete menu, the only product which remain to be add up is credit cards. We have a fairly decent and growing portfolio, as the market has grown very rapidly in the last two, three years so does MCB. The real growth started to come from 2005 onwards when consumer banking was actually made part of the retail banking group to bring more focus on this activity and to ensure that there is a lot of synergy between the branch banking channel, the direct sale channel to actually enable us to cross sell to the existing MCB customers so we are doing well, we are growing rapidly, at the same time in the last one year or so we have tried to incorporate a lot of disciplines related to risk management into our processes, into our procedures, into our lending criteria to ensure that growth is balanced and profitable and that two or three years down the road, we are able to sustain the momentum through profitable portfolio.
PAGE: Now tell us a little about interest rates that MCB is following in relation to its credit oriented activities.
MA: Interest rate policy is basically quite aligned with what market is doing. The interest rate structure over the last eighteen months has increased quite sharply. Gone are the days when banks were financing cars at 8% or 9%. As the rate structure has gone up, all banks have actually put up their pricing and MCB has also done that however we are not the most expensive in the market. I would say we are somewhere in the mid tear and we are keeping a very close eye on the interest rate structure to ensure that not only our spreads are maintained but we don't pass on unnecessary burden on to the customers.
PAGE: One thought is that if the interest rate would go beyond 15% there is a high risk of substantial default from the consumer side... What is your view on that?
MA: It really depends on what product you are talking about. As far as credit cards are concerned, the average for a credit card has been 30% for the last so many years since the time of the launch. I don't think anybody has dropped any rates or increased the rates. Since the first card came into the market at 36%, more or less the rate structure has been around that mark. I would hence disagree with that misconception that if you hit 15% default will start to come in.
As far as other areas are concerned it really depends on how you gauge the risk appetite of the borrower. Normally, it is said that because of the high installments in home loans or car loans may be, higher interest rate will affect the performance of the borrower in terms of servicing his debts regularly but I am of the view that it might have an affect to the extent that the borrowers may shy away from obtaining loans at the rate which were previously there in terms of growth that we saw in consumer financing over the last three years but the market is becoming more and more aware of what the requirements are, what the implications are if certain borrower is unable to regularly service his/her loan and that is come about because of improving infra-structure around us. Five years ago there are no bureaus, now you have a negative bureau, State Bank has just started positive bureau, the ECIB which just came on stream couple of weeks ago so borrowers are also aware. They are becoming aware of the requirements and implications of non payment so all this is going to lead to responsible lending from the banks and banks will also and have also benefited in terms of having better knowledge of the borrowers. I think the infrastructure has been improving so the banks have access to more and more information on the borrower. Now lot of the banks have the requisite tools to be able to analyze the borrowers profile in a much better way than it used to be many years ago and secondly also predict portfolio performance and portfolio behavior more accurately. So those tools are there, infrastructure is there, it really now depends on how responsible certain banks want to be in growing their portfolio. The tools are all there, certainly there can be further improvement in the infrastructure, there can be further refinement in the tools but the basics are well laid out and therefore it's a lot easier now for the people who are involved in underwriting loans, people who are responsible for monitoring those loans to really have a more balanced portfolio.
PAGE: You mean to say that the banking and leasing sectors are now prudent enough to ensure that the money they are lending will be returned also.
MA: There are two three things that banks can do. They can rely on whatever historic information is available on the borrowers so the requisite tools in that respect are available, it is up to the bank either they use the tool or not to use the tool and to make intelligent decision out of that. Secondly, as far as consumer financing is concerned, very critical element is that the bank should be able to derive learning out of its own portfolio; portfolio insights, portfolio knowledge is actually a goldmine. It tells you actually what category , what type of borrowers have performed, how they have performed in the past, what is the likelihood that they will default or they will remain good over the next couple of years so there is information available, it really depends on how much you want to mine that information and then make useful decision.
PAGE: Do you think MCB is a giant in consumer financing?
MA: I don't think we are a giant yet in consumer financing, let's called a spade a spade. We are certainly moving towards that ambition. Right now we are not a giant but we have a fairly reasonable sized portfolio. Last year the board approved the consumer banking expansion strategy and by virtue of that we are now making inroads into the consumer financing market more aggressively than we have been in the last many years.
PAGE: How does MCB plan to manage the risk attached with it?
MA: Well, there are many factors which contribute to risk and there are many tools available to mitigate the risk. First of all I think the understanding of risk needs to be there so for that you need specialized risk function. People who have had an insight of consumer portfolios, people who have seen portfolios develop, mature and then stay at certain levels so that is a very important first step for any bank which is looking to grow the consumer goods.
We have a specialized risk function, we have got a dedicated risk function, we have got specialized people looking at portfolio management and then we have got specialized unit for collection and recovery so the basic frame work is there. Secondly, all the tools which are generally recommended to assess a consumer borrower are used, we have got pre-defined criteria for providing loans, borrowers are assessed from that process, they go through the rigorous assessment process then portfolio monitoring is also a very important key.
Consumer banking is all about portfolios, how portfolios behave and its all about how well you mine the portfolio into various cuts and do you analyses to get the right information to see how certain cross section of portfolio is behaving, what inferences can you draw from that and how you apply those inferences to get to the right one. If those disciplines are there you can be reasonably sure that you will be able to do quality lending.
Even if a certain type of loan start giving trouble then through portfolio insights you can at least predict well in advance that this is going to happen because the signs start to appear five to six months before the crisis is supposed to take place. However I wouldn't say that there can be never a situation where there won't be any crisis, there could be a situation where certain section, a certain geography might not behave properly, a certain profession might come into trouble. So once it does happen despite your best estimates. While you can have tools to ensure the crisis is minimized. You have to have a very strong collection and recovery structure to ensure that there is timely resolution of such cases.
PAGE: Do you think that the demand and supply gap could easily be filled through the approach of consumer financing, since we have a very narrow consumer base?
MA: It's really difficult to hit an equilibrium position where demand will meet supply but obviously in the last two three years the gap has narrowed down because the growth of consumer financing has been so rapid. The demand will continue to be there as Pakistan is a country which has a population of 160 million plus. If we share numbers the demand will always be there. Population growth will certainly trigger that and secondly the consumer pattern. There is so much consumerism today than it used to be ten years ago. Ten years ago it used to be unheard of that people will actually go and take a mortgage to buy a new house; today it is becoming more socially acceptable so these patterns have changed. On the other side where personal loans and cars are concerned, the demand will grow because of the consumer demand for a better lifestyle. Today it is fine to borrow, initially borrowing was not ingrained in our culture as a nation but I think people are getting more used to the fact that this is there and as long as the banks offer various options which are affordable, one can at least try it out.
I personally think that this demand factor is going to be there always. It's just that in the last two three years a lot of pent up demand has been unleashed that resulted in so much growth. Also because consumer financing is new, lot of new players came in and they started consumer financing, they gave it a push and that's why consumer financing has really grown. However on supply side there are actually more than a dozen banks which do consumer financing actively. There are more players coming in, that's primarily because everybody is reading the market in a way that they all feel that there is going to be demand so supply side has to be there. And finally I think the regulators have also played their role in the last two years. First the interest rate environment was very favorable but at the same time lot of regulations is coming. The regulators recognized that this is the need for this country and they need to play a very vital role in promoting responsible lending by the banks so lot of regulations are coming, a lot of streamlining is taking place at the regulatory level to ensure that the borrowers interest are protected at the same time the banks have enough levy to grow.
PAGE: How do you see the role of Central Bank in that respect?
MA: Over the last three or four years the Central Bank has encouraged responsible consumer banking. Two years ago they came out with a whole set of prudential regulations specifically related to consumer banking which was a big step towards recognizing that here is a need which is going to grow rapidly therefore the sooner we regulate the better it is going to be both for the banks and the borrowers. And especially I would say that the role Central Bank has played in promoting housing finance is commendable. They facilitated workshops, they brought in experts from other countries, and they are looking at the infrastructure to get better and better. Tax laws have been changed so lot of initiatives have been taken in the last two three years to ensure that banks find it advisable to get into housing loans.
PAGE: Talking about the rising inflation scenario, how much do you think it will affect the consumer financing?
MA: It will to a certain extent. The rule of thumb is that if inflation is there, if inflation is rampant, it is going to affect the purchasing power and therefore affect consumer capacity. That is why we have all the tools that I talked about earlier; if banks are doing responsible lending if they are taking into account the fact that the borrower needs to make certain payments for the debt and still needs to have enough money to go on with his day to day life so those will be prudent decisions as opposed to decisions which do not take into account the borrower indebtedness and the borrower's other requirements, if you just want to lend more than what he can absorb, you bound to get into trouble. Secondly the borrowers have also become aware of these situations and also very conscious in the sense that they know that the infrastructure is getting more organized and if there is going to be default then no other bank will look at him for financing. I think inflation will definitely have an affect in curtailing growth but at the same time I still feel that there is still enough room in the market to grow.
PAGE: Obviously consumer demand will shrunk by rising inflation and indirectly by rising interest rate, why can't the banks adopt fixed rate strategy for certain credit oriented activities?:
MA: Well, banks are offering fixed rate products. The bank offers both options to the borrowers. It's basically the borrowers choice what he wants to go for. Generally fixed rate products are more expensive so it really depends on what view the borrower is taking up for interest rate scenario. Today if you lend to a borrower a home loan, I don't think any bank will be able to give a fixed rate home loan at less than 15% where as variable rate home loan could be 13% to 13.5% so if the borrower feel that two or three years after in any case the interest rate scenario will go up to 15% to 15.5% or go beyond that then it might be feasible to lock it at 15% but if he feels that interest rate would remain at 13% or 13.5% or it might go a little up but then also come down as the borrowers have also seen the situation just two years ago where rates were at about 8% to 9% so it will take time because consumer financing in this country is very new. At least in the west these products (home loan, car loan etc) are in their mature stages and those countries have seen various economic cycles as well as ups and downs in the consumer banking so borrowers actually have their own views, they are also more informed about the different banks. In Pakistan the situation is fairly different. In my view even now we have not come to a situation where borrowers are demanding fixed rate products although the option is there.
PAGE: What do you say about the growing interest rate scenario, would it affect the demand for credit?
MA: Of course, it will. In the last one year we have seen just a little decrease in the growth of consumer financing and mainly that decrease has come in products which have higher exponent component like house loan and car loan, that again in terms of volumes because the market is growing, consumer financing continues to grow but in percentage terms, yes, the percentage growth will continue to taper down until it settles down at a more practical level.
PAGE: If we talk about consumer asset finance, there is not much demand towards this particular side, what is the reason for that?
MA: It's really the attitude of the borrower; it's the psyche of the borrower. Also credit culture is still emerging in this country so taking a loan for twenty years is still something that lot of people would think twice before going for it. On the other hand installments is generally high for the house loans, the documentation requirement is quite stringent. Because of that as it is more to do with a long term commitment which is opposed to a personal or a car loan where the commitment is for three years or five years, when you look at twenty years then you would rather do something else like wait or accumulate or borrow from other resources. It's also to do with the social set up, a lot of people especially coming from the middle class background still live in combine family system where as in the west every couple want to have a place of their own. Ideally the real growth in this country should have come from the lower level people. Like new couples getting married, getting new apartment to have a place of their own, in a big way that hasn't happened significantly because of the social factor but the concept is definitely emerging and may be in the next five years time, the situation will be different.
PAGE: Having a narrow consumer base and per capita income that is quite uneven in our society, don't you think that consumer financing is just catering to one segment of society?
MA: It really depends on the product. Banks have obviously tried to go down market. Look at credit cards and the personal loans where the ticket sizes are small. Banks can afford to have actually been going down market and looking at people with lower income loans. It has happened but then there needs to be more work done in that respect and also banks have to have that confident that the lower income group will perform well in terms of credit performance. Everybody is a bit weary of that but as consumer financing develops in this country, as the infrastructure gets better and the banks have the requisite tools to really monitor performances in a more structured and organized way, I am sure that banks will need to look at those segments because otherwise market will just get saturated.
PAGE: How successful do you think are the credit oriented activities in raising the standard of living of a common man (from a middle income group)?
MA: It's the reason why you see so many lifestyle products on offer. Five ten years ago I don't think so many options were there. I don't think people even look at those options. If you bought TV, you thought to live with it for ten or fifteen years, today there are so many options banks are offering like (Plasma TV, LCD, Flat screen TV), home installment plans, there are replacement options for cars so people feel that why to commit to something for ten years when you can actually replace it much quicker. Definitely, it has contributed significantly in raising the life style.
PAGE: We as a society are on a low saving graph, what are the keys to draw more and more people towards consumer financing?
MA: Right now, it is need based. I agree that savings are generally low, we have a very slow saving rate and that probably itself a reason why people go for these financing options because if I have money in the bank, I might not go for financing but then you come across all sorts of customers, you come across cash rich customers also, who have the money to really go and purchase car outright or get a plasma TV outright but they still opt for financing primarily because they feel that the surplus cash can be used for longer term investments or for other longer term ventures so if financing is available conveniently and it is broken up in installments, there is no harm in trying it out.
PAGE: Do you agree with it that the consumer financing is linked with the growth of industries and trading activities?
MA: Obviously if consumer financing is going to facilitate people buying more cars, more homes or more appliances, at the end of the day the supply side will also become stronger as it has to keep pace with the demand side. Just look at the example of the auto industry in Pakistan, the way it has grown. It is one of the major tax payers and contributors to the tax revenue in the country. That happened because today almost 50% to 60% of cars that they produced are being financed. So definitely this is going to have a backward effect on the supply situation.
PAGE: Last of all, how do you see the progress of MCB consumer banking in the coming years?
MA: We have got very aggressive plans on both financing and deposit mobilization sides. We already have a very strong customer base and a very dominating presence as far as our branch network is concerned across Pakistan. Consumer financing on the other hand is a new initiative but we have plans to grow it rapidly and to ensure that in the next two years, it will become the leading player in the market.