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Addressing NPL: Introducing loan pricing

| Updated: December 29, 2019 20:49:51


Addressing NPL: Introducing loan pricing

Many policymakers and bankers may not be aware how online CRM (Credit Risk Management) portal works. This is an integrated computer application where multiple departments have access under separate windows. When borrower is selected for financing, concerned relationship manager/branch officer will prepare e-credit presentation using this system where in-depth analysis will be carried out. This is basically the same credit presentation which is manually used by banks, and then electronically developed and uploaded in the system. E-credit proposal when prepared will be electronically reviewed by all responsible officers/managers who if satisfied, will sign off electronically. As soon as viewing and signing off is completed, the e-proposal will be submitted by selecting submission option and this e-proposal will then be automatically uploaded to the CRM team at the bank's Head Office with automatic notification through system and official email.

The Head of CRM or designated supervisor will then assign credit office to conduct their own analysis which will also be carried out in the same system. If CRM analysis finds the proposed credit facility is in conformity with all rules and regulations, they will arrange to approve the loan. If adjudicating delegation is at CRM level, online approval will be done by selecting approval option. If adjudication is at senior management level -- CEO/DMD or Board of Directors -- online approval process may not be applied.

In this situation, CRM will complete its recommendation and all responsible executives will sign off electronically with their comment/note, if any. Thereafter, a short report with brief description of all e-credit proposals submitted in the system and subsequently recommended by CRM team will be generated for submission to the higher adjudicating level -- CEO/MD and Board of Directors. Credit decision, either approval or rejection taken by adjudicating authority, will be updated in the same system and accordingly, any rejection notice will be automatically sent to the respective branch/relationship manger, while approval note will be automatically uploaded in the Credit Administration department with simultaneous notification to the concerned RM/Sales team. This department will then perform all other subsequent actions what include completion of documentation, setting up loan limit, disbursement, realising applicable fees and finally recovery. This process will also be carried out electronically using the same system except where the requirement of submitting original document/instrument and signature arises.

In fact, the entire process of Credit Risk Management will be done electronically without using any single piece of paper. During the process, there may be need for various queries and cross-communication. However, this can also be completed electronically using messaging option of the online CRM portal. Nevertheless, if urgent communication is required particularly when CEO/MD or any board member remains out of station, approval/consent/support may be obtained using official email which can be saved/uploaded in the same system as proof.

PROCUREMENT OF ONLINE CRM APPLICATION/SOFTWARE: Bank can develop this type of Online CRM application in-house with the help of IT experts and knowledge of business-line management. Alternatively, bank can procure from either domestic IT company or any regional/international IT company. All banks may procure it separately as per their need and specification, however, there must have some uniformity so that industry standard is maintained and inter-bank transaction/communication can be smoothly carried out.

CENTRALISATION OF LOAN OPERATION: Loan pricing includes considerable amount of operational cost which mostly comes from Credit Administration department. This department plays a dual role as its efficiency activity ensures expeditious loan service to the borrower and at the same time helps maintain healthy loan portfolio. This department also helps to ensure the end-use of loan and as such prevents fund diversion which eventually keeps loans from being NPL. Once digitalisation of CRM is completed, banks will be able to also considerably cut on costs due to reduced number of stuff.

INTRODUCING RISK-BASED LOAN PRICING: Risk-based loan pricing is now very popular across the world. However, Bangladesh banking sector stays away from this modern technique of loan pricing. Demand for flatly bringing down lending rate to single digit is not apparently a reasonable move because different borrowers carry different levels of risk and as such risk premium of each borrower should be different. Borrower with very good credit standing carries minimum risk, so he deserves lower lending rate and on the other hand, borrower exposing relatively higher risk should pay more for higher risk premium. Risk-based loan pricing allows banks to equitably charge the borrowers commensurate with the degree of risk the borrower carries. It is obvious that a borrower with strong creditworthiness should not pay equal to what a borrower with less creditworthiness pays.

This differential treatment to the borrowers depending on their creditworthiness can be ensured through applying risk-based loan pricing. Under this method, loan price contains two components of which one is the cost of fund while the other is risk premium which is termed as spread. The former is fixed in nature but varies with the movement of money market condition while the latter varies from borrower to borrower. For example, a bank with its cost of fund (CoF) at 7.0 per cent follows spread 5 which ranges from minimum 1.50 to maximum 5. Under this situation, the bank can offer the best single digit lending rate 8.50 per cent (CoF 7.00 + spread 1.50) to the highest creditworthy borrower while 12 over cent to the lowest creditworthy borrower. Previously I have written a series article on risk-based loan pricing in this newspaper showing how this mechanism works. This is also part of CRM modernisation and right now, it could be a solution for reducing the lending rate to single digit.     

CONCLUDING REMARKS: Non-performing loan (NPL) is a longstanding problem that cannot be resolved within a short span of time.  Banks will have to learn to live with it for the time being and will have to undertake long-term plan to get rid of it. So, right now high volume of NPL contributing to higher lending rate cannot be avoided.

 In our country's banking sector, deposit is the only source of fund and bank has to offer higher rate of interest to mobilise and retain deposit. Even, banks have to compete with higher rates offered by various government schemes which keeps deposit rate very high. Moreover, since deposit is a very sensitive issue with social and economic implications, measures cannot be taken to unilaterally reduce this rate. However, banks may offer different deposit rates establishing cap for maximum deposit per family. Deposit below that cap will be offered higher rate matching with those of government savings schemes while any deposit above the cap will be provided market competitive rate. In addition, policymakers, central bank, government, commercial banks and the business community will have to actively consider establishing secondary bond market to provide alternative source of fund to both lenders and borrowers. The bond market will not only reduce the lending rate but also make the rate highly competitive.

 

Nironjan Roy is a banker based in Toronto, Canada. 

[email protected]

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