We are at the beginning of a retail boom on lending side of our financial sector. Lenders are offering lucrative rates and minimal fees to attract prospective clients. In case of home loan, interest rate is one of the major tools to exert a pull on the customers. There is a competition in the industry to trim down the home loan interest rate. Some of the lenders are offering very low rate to lure new customers while high rate is prevails for the existing customers. Moreover, some of them charge higher interest rate after three or four months of disbursement.
On the other hand, customers switch from their present lenders without knowing much about the alternative lenders. They switch banks on the issues of early adjustment fee, mortgage redemption fee, new mortgage fee, documentation fee and service charge/loan processing fee.
But, in the event of switching from one lender to another, clients ultimately lose their bargaining power by sinking themselves under huge debt burden over a period of time. For example, a client is enjoying a home loan of Tk 5.0 million from a finance provider against registered mortgage of his land and building valued at Tk 12 million. The client spent the loan amount for construction of his building and he is happy with his present finance provider.
Then, the second finance provider comes to the scene and offers Tk 10 million with lower interest rate. Now, the client thinks if he gets an additional amount of Tk 5.0 million, he may change the fittings of his building and invest rest of the money in the capital market to earn more within the shortest possible time. He vacates his house by giving notice to the tenant as he has to show some construction work to abide by the sanctioning terms of the new finance provider. Over time, the client loses maximum portion of his money in the capital market since he has no experience to handle the stock market ever. The client is facing the real music now since he can't manage the EMI (equal monthly installment) from the rental income as the EMI is also getting double with his new enhanced home loan. Meanwhile, another finance provider comes to the client and offers Tk. 12.00 million by inflating the value of his land and building.
Again, the client spends the additional amount of money for adjusting the existing loan with early adjustment fees, further mortgage cost and so forth. After servicing some of the EMIs of new loan, the client is feeling that he has no ability to repay the bank loan with interest. Now he wishes to settle down the loan by selling the property as he can't bear the burden at this moment. At the stage of negotiating, the truth comes to the front that the actual market price of the property is lower than the loan he has already taken. It's like a trap: once anyone gets in, he will get stuck.
BB CIRCULARS: Financial marketers need to concentrate on those consumers who voluntarily decide to switch. According to a study from Market Force, a North American customer experience management (CXM) company, one in five banking customers is not satisfied with his relationship with his primary bank. The primary reasons centred on both dissatisfaction with fees and the service provided by the institution. The customers are fed up with paying interest/fees on their loan accounts and gaining little or no interest on their checking account. They want access to consumer-friendly technology and are looking to get all the services from a single point.
In this regard, the Bangladesh Bank has issued a circular from its Customer Services & Complaint Management Department. It has instructed the banks to serve notice giving one month's time to its clients who are enjoying term loan having floating rate of interest (or profit as referred to Islamic banking terminology) in the event of increasing the rate of interest or profit providing justification for doing so. The revised repayment schedule with up-to-date liability position of the respective client(s) shall have to be accompanied with the notice to be sent via e-mail or letter through mail/courier. The client is allowed to adjust the loan or investment in full without paying 'Early Settlement Fee' or any additional fee within one month if s/he wants so in case of rise in the rate of interest.
No 'Early Settlement Fee' shall be imposed on any continuous or demand loan (or investment as referred to Islamic banking terminology). In case of default installments, late payment fee/penal interest shall not be more than 2.00 per cent above the prevailing rate of interest/profit applicable for respective loan/investment.
In another circular, Bangladesh Bank has given directives to the scheduled banks for establishing regular monitoring and reporting systems, including borrower follow-up and mechanisms to ensure that loan proceeds are used for the stated purpose as he declares at the time of loan application. The central bank also advised the scheduled banks for rationalisation of fees and charges on Cottage, Micro, Small and Medium Enterprises (CMSMEs) and not to charge early adjustment fees on loans under this sector.
BANKS VERSUS FIS: There are 56 banks and 33 non-banking financial institutions (FIs) in the financial market but the prudential regulations for banks and FIs are not the same. The key retail banking products are creating huge confusion in customers' mind as a lot of inequality is prevailing in the rules and regulations of the banks in comparison with those of FIs (see Group).
From the Graph it is clear that the regulations are in favour of non-banking financial institutions (NBFIs) over banks. The banks, on the other hand, have a much higher opportunity to expand retail business through branch network, doing trade finance business and access to checking accounts. There are excessive restrictions for NBFIs in this regard.
AVERTING FINANCIAL CRISIS: The Western financial markets are still to fully recover from the shocks of the 2007-2008 financial crisis. The underlying cause of the financial crisis was a combination of debt and mortgage-backed assets. There were hundreds of billions of dollars of mortgages given to individuals with poor credit ratings on adjustable rates.
The crisis was not felt by Bangladesh since our economy is not so big and not so integrated with the Western world. Moreover, we have no financial products as the USA had. Our crisis will be different in nature while the market is not mature enough. We lack in innovative products, IT infrastructure and sufficient skilled manpower. Widespread financial literacy, digital infrastructure, level-playing field, strong monitoring and stringent guidelines may help avert crises in financial sectors. The banks/FIs should to focus on issues like signing up new customers and keeping existing ones happy. They should also prepare for digitalisation of banking products and services. This is because in the near future, digitalisation will change the traditional banking business model - in some cases, radically.
The writer works in a private commercial bank.