"It was the best of times, it was the worst of times?" So begins Charles Dickens' A Tale of Two Cities. While banking and capital market firms still have some ways to go, and thus this quote may not be true in the literal sense, industry leaders are looking forward to a better year ahead.
Many industry experts say the competitive environment continues to be brutal in the banking industry in the coming. Even smaller banks with purely local strategies will be compelled to react to growing cross-border M&A.
The question has been raised what would be the prime strategy for the banks in Bangladesh to survive in the upcoming competitive environment specially, when they are now suffocated with rising bad assets?
Mr. Shah A Sarwar, Managing Director of IFIC Bank has said the aptitude of managing strategic and current risks associated with a bank will decide the fate of the industry in coming days.
"If any bank takes away its eyes from fundamentals of risks management, it will certainly face an uncertainty", he told The Daily Observer during an exclusive interview last week.
Now the top priorities for banks are regulatory compliance, improving asset quality, enhancing customer centricity, focusing on digital convergence, and tackling competition from non-banks, he said during an hour-long talk on the banking industry at his office, Mr. Sarwar said.
"The appetite of the organization, ability or choice of the risk manger and their business model will define the shapes of banks in Bangladesh", Mr. Sarwar said reminding that local banks are living in a highly interlinked fast-changing global market environment.
Since the beginning of its journey as a commercial bank in 1983, IFIC Bank, a leading private commercial bank in Bangladesh, has been laying great emphasis on the adoption of modern technology in its operations, he said.
Mr. Shah A Sarwar joined IFIC Bank Limited as Managing Director on 02 December 2012. He has core expertise in Strategic Risk Management, Business Process Reengineering, Creation of New Lines of Business, Change Management and Automation Project Management.
Over the last 33 years, his career evolved as a well rounded banker with optimum exposure and training in all areas of banking with international stints in Australia, London, Hong Kong, Dubai, Singapore, Sri Lanka and Pakistan.
The CEO of the IFIC Bank expressed his personal views, thoughts and ideas on the state of the country's banking industry in contextt of global industry trends during an hour long discussion with the Economic Editor of the daily last week.
Global banks have had a tough time in the past five years. Soaring capital adequacy ratios and ballooning compliance costs have forced them to look carefully at their business models and cost bases, he said.
"The last five years in the banking world was truly extraordinary, while much still remains to be sorted out, especially on the regulatory front. The industry for the most part has taken a number of proactive steps to adapt to the new environment", IFIC Bank CEO observed.
"We have got to get bigger or someone will be bigger for us", he said.
There's no formula for the risk score, and every bank is expected to approach it differently based on its business. But technology here can help the banks to managing down risks, cutting costs and increase transparency, he said.
"If banks ignore the technology, it will put its tolls on them", Mr. Shah A Sarwar, a global industry analyst told the daily.
Many industry experts say that the next year will likely be one of continued challenge for the executives of banks in the country. In 2013, the balance sheet size of the industry grew notably, compared to the previous year. But the growth rate was lower though most of the income earning assets registered a positive mark.
Margins are under extreme pressure, and business models and product structures are becoming more standardized. Competition from nonbanks has also increased in the payments and business lending space, as they continue to benefit from limited regulatory constraints and surplus liquidity of banks.
"Not only are the institutions competing, the regulators and customers are also pitching one against the other, making the situation extremely difficult giving you the feeling of being stuck between a rock and a hard wall.
Mr. Sarwar, however, is very optimistic about the future of the country's banking industry.
"The banking industry is moving toward on the right direction. The regulators are active and prompt in actions. Information technology (IT) has become a vital and integral part of business model and has opened the window of new opportunities, he said.
The bright example is the rapid growth in mobile banking business, which enabled the country's banking industry as a role model of the world markets", he added.
The recent government's move allowing more private banks in 2013 suddenly came up in the discussion. Some top bankers already have expressed concerns that the newly launched private banks will create fierce competition in the coming days and some of them may face merger or acquisition.
Competition will potentially hurt profitability, unless asset growth favors everyone alike, they feared. The question was who would survive in the competition especially when too many banks are crawling within a too small space now for a small cake?
"It depends on how one institution focuses risk management. How they individually are equipped with clear business models, their choices and their capacity in building technological process to support the model", Mr. Sarwar straightly answered to the question.
With the historic evolution of the capitalist world under the free market society, Mr. Sarwar said, merger and acquisition take place. But I don't see any major debacle in the banking sector as banks have more business opportunities. More than 50 per cent people are still out of the banking coverage, he said.
"In banking world, merger or acquisition is not a matter of surprise or not a matter of concern. The ownerships of some first generation banks have changed hands over the years", he said.
"Bangladesh is not an overbanked country, it may be over bank-company country. Banks have wide scopes to expand their business through financial inclusion", he said.
The big challenge for the domestic banks, however, is that the cost of credit is gradually emerging as a key detriment in investment decisions. While interest rates in the money markets and the yields of government securities are coming down, the pass through to the credit markets is still not strong.
Large corporations remain wary of committing to significant investment, and many are sitting on major cash reserves, when high lending rates and various fees charged by banks discourages entrepreneurs to take loans from banks.
"The big challenge for banks is increasing their asset quality and reducing the volume of classified loans", Mr. Sarwar told the daily.
Historically, Bangladeshi people have not enough equity. All good borrowers are subsidizing bad borrowers. Time has come to change the attitudes. And banks should use the appropriate tools of risks management to address the situation, he said.
Lower credit growth dragged down the banks' net interest margin in 2013 driven by changing composition of gross earning assets. Banks' net interest income to the asset dropped by 1.7 per cent in 2013, while the non-interest income to the assets increased by 2.7 per cent.
Banks money at call has increased significantly in recent years driven by higher inflow of funds, which pushed down the advance-deposit ratios of many banks below the indicted level in 2013, according to the Bangladesh Bank report.
Mr. Sarwar, however, hopes the situation will improve in the coming days as interest rate is coming down. The focus should be on fundamentals of risk management of banks", he said.
While credit risk in relative term decreased because of lower credit growth, Bangladesh Bank in its annual Financial Stability Report has pointed out that market risk increased in 2013 due to increase in the price of equity prices.
In this regard, Mr. Sarwar suggested banks to increase operational efficiencies in managing market risks.
"When people take of the eyes away from the basic fundamentals of managing credit risk for making super profit, then crises start and they fall. The US subprime crisis is the glaring example of this', IFIC Bank managing director said.
Mr. Shah A Sarwar also discussed on other key operation issues recently took place in the industry and has expressed his optimism about the rapid advancement of futuristic banking in the country driven by the proactive role of the central bank.