About retail banking pricing
Thursday, 25 December 2008
Ahmed Showkat Masud
THE significance of retail banking has been growing rapidly. Loans to individuals, small and medium enterprises (SMEs) have been treated worthy for being considered valuable and income generating sources like corporate loans to the banks. For granting loans to any individual, bank officials consider the persons' net worth. Generally, how much amount of money the persons can save after meeting all of their expenditures, is taken into consideration for judging their net worth. But, in case of an enterprise, be it small or medium, banks want financials to judge the strength of that concern.
For corporate clients, it is easy to get the financials required by the banks. But most SME clients cannot provide the same to the banks. In that case, bank officials help them to prepare the financials. Besides financials, banks also bear business risk, industry risk, management risk, security risk and relationship (with the lenders, that is banks) risk.
For retail customers, that is individuals, small and medium enterprises, business risk is relatively high. Because, their income and sales volumes are relatively small, business outlook of such customers is often slightly uncertain. Most of the retail customers do not have collaterals to offer to the banks as security. This is security risk for banks which also reflects low net worth. But in case of corporate clients, these kinds of risks are relatively low. At least, that is so in their furnished papers. But the reality is that most corporate clients are highly leveraged in our country. The competition for profit is responsible for this situation. Corporate guarantees are not enough to protect the financing institutions' interests. Therefore, to minimise credit risk, banks are giving more priority to the retail banking.
Though the retail banking has been getting more priority as like as corporate banking, the retail customers are paying higher charges, fees and commissions to the banks. For example, credit card is allowed to individuals by charging charge excessive rates of interest from the clients. Besides excessive rates of interest (2.50 per cent per month), there are other charges like Tk 500.00 as late payment fee, VAT on late payment fee, credit shield premium along with VAT etc. The customers have to pay all such charges. Renewal fee for them is Tk 2000. This example has been given from a non-banking financial institution that issues credit card. Banks are charging almost the same rate of interest and fees for credit cards. Banks' interest rate and fees for SME clients are also very high. Banks are charging between 16 per cent and 19 per cent rate of interest to their SME clients. Besides this banks are realising 2.0 per cent (processing fee, monitoring fee, service charge etc.) on the amount of loan at the time of disbursement.
In this situation, what are the effective rate of interest and other fees in case of credit cards and SME loans? In case of consumer credits, the picture is almost same as that of SME loans. These sorts of rates of interest, fees, etc., charges could be termed predatory lending; the type of clients in such cases is counted more heavily than the amounts of money to offset the credit risk. Credit cards and consumer loans help the clients to purchase the desired goods when they are not capable to pay at a time. The importance of SMEs for generating employment opportunities and increasing the gross domestic product (GDP) is well-recognised. So, why should the rates of interest, fees, charges etc., not be rationalised for such customers? Retail clients are paying more than they should.
(The writer is a banker at Anderkilla Branch of a private commercial bank in Chittagong)
THE significance of retail banking has been growing rapidly. Loans to individuals, small and medium enterprises (SMEs) have been treated worthy for being considered valuable and income generating sources like corporate loans to the banks. For granting loans to any individual, bank officials consider the persons' net worth. Generally, how much amount of money the persons can save after meeting all of their expenditures, is taken into consideration for judging their net worth. But, in case of an enterprise, be it small or medium, banks want financials to judge the strength of that concern.
For corporate clients, it is easy to get the financials required by the banks. But most SME clients cannot provide the same to the banks. In that case, bank officials help them to prepare the financials. Besides financials, banks also bear business risk, industry risk, management risk, security risk and relationship (with the lenders, that is banks) risk.
For retail customers, that is individuals, small and medium enterprises, business risk is relatively high. Because, their income and sales volumes are relatively small, business outlook of such customers is often slightly uncertain. Most of the retail customers do not have collaterals to offer to the banks as security. This is security risk for banks which also reflects low net worth. But in case of corporate clients, these kinds of risks are relatively low. At least, that is so in their furnished papers. But the reality is that most corporate clients are highly leveraged in our country. The competition for profit is responsible for this situation. Corporate guarantees are not enough to protect the financing institutions' interests. Therefore, to minimise credit risk, banks are giving more priority to the retail banking.
Though the retail banking has been getting more priority as like as corporate banking, the retail customers are paying higher charges, fees and commissions to the banks. For example, credit card is allowed to individuals by charging charge excessive rates of interest from the clients. Besides excessive rates of interest (2.50 per cent per month), there are other charges like Tk 500.00 as late payment fee, VAT on late payment fee, credit shield premium along with VAT etc. The customers have to pay all such charges. Renewal fee for them is Tk 2000. This example has been given from a non-banking financial institution that issues credit card. Banks are charging almost the same rate of interest and fees for credit cards. Banks' interest rate and fees for SME clients are also very high. Banks are charging between 16 per cent and 19 per cent rate of interest to their SME clients. Besides this banks are realising 2.0 per cent (processing fee, monitoring fee, service charge etc.) on the amount of loan at the time of disbursement.
In this situation, what are the effective rate of interest and other fees in case of credit cards and SME loans? In case of consumer credits, the picture is almost same as that of SME loans. These sorts of rates of interest, fees, etc., charges could be termed predatory lending; the type of clients in such cases is counted more heavily than the amounts of money to offset the credit risk. Credit cards and consumer loans help the clients to purchase the desired goods when they are not capable to pay at a time. The importance of SMEs for generating employment opportunities and increasing the gross domestic product (GDP) is well-recognised. So, why should the rates of interest, fees, charges etc., not be rationalised for such customers? Retail clients are paying more than they should.
(The writer is a banker at Anderkilla Branch of a private commercial bank in Chittagong)