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In wake of the financial meltdown that started in 2008, financial institutions were the
worst beneficiaries of the global crises. Pakistan also was not spared and economically
suffered a supply shock in the form of all time high oil prices which took the inflation to
its all-time height to 22%. To manage these shocks Pakistan immediately hurried to IMF
for bailout package for more than 10 billion dollars while SBP played its role by
increasing the discount rate and other statutory requirement to curb the rising inflation
while relaxing the capital requirements for banks.
The aftershocks of the global meltdown in 2010 are still haunting the Banks in Pakistan,
in shape of detoriation of quality loan portfolio. In 2008 alone the NPL portfolio
witnessed an astonishing rise of 64.7% from 218 billion to 359 billion. This increase in
portfolio detoriated the banking industry profit by 107 billion, which was 46 billion in
excess of 2007, while in 2009, NPL portfolio rosed by 20.3%. The second major impact
to the banking industry was the increase in cost of funding which surged from 4.3% in
June 07 to 6.2% in June Dec 09 but has come down from 7.2% in March 09.
Surprisingly the spreads didn't shrink by dec 09 and remained stabled at 6.8%. The
main reason is that the banks are cutting down the rates on deposits to maintain the
spreads. On one hand the current deposits are increasing in the industry on the other
hand saving deposits are substituting with fixed deposits which intails increases the cost
of funds. This shift in the deposits is primarily attributed firstly to SBP incentive policy
to mobilize long term deposits through CRR and secondly banks own initiatives to
narrow the mismatch of assets and liabilities. And finally the last but not the least is SBP
initiative to introduce a floor of 5% on saving deposits beginning June 2008 which
increased the cost of funds by 56 bps. In 2010 Pakistan yet again witnessed a new shock
in shapes of floods destroying the 70% of agricultural land. The Banking industry is yet
to take the impact of these floods which could actually hit the SME sector in a very
terrible manner, the impact of which would hit the dec 2010 results. The after shocks of
these floods would again trigger the inflation rise to 25% as per the government
statistics while IMF's calls for 22% inflation, which currently is standing at 13%.
HMB was not the exception to this aftershock phenomenon, but has greatly managed
itself to maintain its profits by efficient management of expenses, change of leadership
and lowering of cost of deposits. Nevertheless, the rising inflation would again bring in
the new economic crises, which would take banking industry towards a point of
saturation in terms of deposits and its cost while profits of the industry would be
snatched by the rising NPL portfolio. The need is to gather the low cost deposits
especially the current and saving deposits, for which there is a dire need to look for
segments of customers which could provide such deposits, a white space in the
economy.
This paper is about highlighting the white space within the downfall economy, for the
banking industry and for my bank HMB. Through this paper I would try to identify the
underserved segments through which HMB could benefit from it and in turn lower its
cost of funds. The paper would highlight the problem as to why there is a need for HMB
to get the deposits from unserved segments. Secondly identification of such segments
through secondary research data and finally the conclusion.
VISION STATEMENT
"Based on the foundation of Trust, to be the most
respected financial institution, delighting
customers with excellence, enjoying the loyalty of
a dedicated team, meeting the expectations of
regulators and participating in social causes while
providing superior returns to shareholders"
5 YEARS OF FINANCIAL ACHIEVEMENTS WITH
REGARDS TO DEPOSITS
Clearly we can see that HMB has exhaled in the Deposit area from 102 billion in 2006 to
142 billion in 2009 showing a remarkable increase of average 10% each year. The
average has gone down due to economic slowdown and in 2008 where it has increased
by only 6%. A tremendous increase in 2005 was due to the merger between the HMB
and Habib bank AG zurich which has not been considered in deposit growth highlights
due to one off situation.
As for funding composition the deposit mix decreased from 70% to 60% mainly due to
the increase in borrowing mix from 17% to 29%. This main increase in borrowings was
due to money market borrowing and SBP export refinance borrowing which both grew
substantially.
The modified ROA is self explanatory whereby it clearly depicts that the ROA is falling
due to decrease in PAT margin which is falling to due to high markup expense. This is
clearly evident that from the cost of funds graph above and Deposit mix where the Cost
is moving from 7.5% in 2008 to 7.9% while current deposits mix fell from 32% in 2005
to 25% in 2009. While the mix of high cost time and saving deposits has grown
significantly.
If we see the deposit comparison HMB has achieved the 6th ranking among the peers
while its stands 7th in peers in growth of current deposit.
Below is the graph of deposit composition of Current and Saving Accounts (CASA) of the
bank. HMB has the 6th largest current deposit composition while is the last in savings
and CASA overall. It must be kept in mind that these current and saving deposits
actually lower the cost of deposits increasing your margin.
We can conclude easily that to succeed in this market and provide shareholders a better
return HMB needs to strive and untapped other markets for deposits before other banks
comes in and start giving competition. HMB's main priority has been in providing trade
finance services which it does and because of this premier reason HMB has been able to
develop its current deposit portfolio. However, due to economic slowdown and current
flooding crises, the economy would be badly affected by increase in discount rate,
inflation which is expected to exceed 20% and higher taxes. All these factors would bring
the business situation at a saturation level. It would be this moment when bank would
aggressively try to find ways to access other markets which is mainly the adult
population of this country. HMB at this moment would have a edge as it would be
delivering those segments already and would be a market leader.
The "Banked"
Those using "Formal Other" financial products and services
Users of "Informal" financial products and services, and
The "Financially Excluded"
Banked
This group comprises of adults who currently use one or more traditional banking
products supplied by a financial institution. This is not an exclusive usage category;
adults in this group may also be currently using one or more "formal-other" or
"informal" products.
Formal Other
This group comprises adults who are currently using one or more formal product
supplied by a financial institution other than a bank by a financial institution operating
under legal governance. Such products include, for example, insurance, leasing,
microfinance, postal financial services etc. These people do not have bank account, but
have at least one financial service from a regulated non-bank financial service provider.
Thus, this is also not an exclusive usage category, as people in this segment may also be
using one or more "informal" products.
Informal
This group consists of any adult who does not have a bank account or a formal-other
service, but uses one or more of "Informal" products that operate without legal
governance. Examples include borrowing from a money-lender, shopkeeper or
participating in a savings committee. This is exclusive usage - the adults in this segment
do not currently use any formal products i.e. "Banked and Formal Other".
Financially Excluded
These are those adults who are excluded from all financial services - Banked, Formal
Others and Informal.
The Banked and Formal Other segments together make up people who are Formally
Included. Adding those who use informal services exclusively broadens this group to
those who are Financially Served. The latter are financially served in the sense that they
are using financial services from either the formal or informal sectors, or both.The
remaining adult population, the fourth segment i.e. the Financially Excluded, are the
ones who do not have any services from any of the formal and informal sources. They
are usually using sub-optimal alternatives or solutions such as sending money by
hawala/hundi (informal means of money transfer), saving at home, and borrowing from
family and friends.
FINANCIAL LITERACY
The table shows the level of financial literacy among the Banked people relating to the
terms that people usually hear and understand. Green highlighted portion refers to the
awareness and understanding about very basic financial terms used commonly in the
population which generally is high. The light blue highlighted region for the
understanding about the financial terms related with the formal financial services which
is less than high, but is less among the women. The yellow highlighted portion refers to
the sophisticated financial terms understanding which is yet even lower and again
women lag considerably behind men. The pink section refers to understanding new
rising types of banking among people who are banked, particularly women!
Training interests of the informally served, financially excluded and those using other
formal services revolves around understanding basic money management and financial
concepts such as preparation of household and personal budgets, how to save, and how
to calculate profit on a bank account. Whereas the banked are only marginally interested
in learning about the products offered by banks.
loan, money transfers, earning an income or payment of utility bills have been stated by
very few respondents.
Further analysis reveals that urban areas are more towards the money safety than rural.
Also the rural areas want to be more into the business relation and to access personal
loans.
Now coming back to the unbanked reasons, the following table gives the right idea:
Access related reasons, interestingly, are not the most important reasons for being
unbanked, than income related reasons are. Nevertheless people who have cited choice
and access related reasons are significant and is a more ready potential market for
banks. These segments need to be studied and analyzed closely so that their reasons for
being unbanked can be addressed in a more targeted fashion. Contrary to the
expectations, socio cultural reasons have been cited by a mere 12% women as a barrier
to being banked!
PERCEPTION
In thinking about the financial service providers, what come more to peoples mind are
the prerequisites for transacting with them rather than their services. The typical service
features that consumers seek from commercial banks and other financial service
providers have scored low. This reinforces the findings of the focus group discussions
regarding weak client service orientation of commercial banks. People's perception
about security of money at the banks is high which also conforms to an important
reason that the banked have stated for having a bank account.
As for informal financial service providers, the top perception statements for
committees and money lenders relate to no requirement of documentation, and
formalities. This is in striking contrast to the perceptions regarding the formal sector
providers. Additionally, more people trust the informal sources as compared to the
formal financial institutions. As compared to the formal service providers, relatively
speaking satisfaction with the informal service providers is high.
CONCLUSION
Constraints to financial access arise from high levels of poverty, with low awareness of
information about financial services as well as gender biasness. Technology can be
harnessed to help expand geographical outreach and overcome low literacy levels.
Physical access can be increased via new technology solutions such as branchless
banking and mobile banking. Simplified financial processes and procedures, client
segmentation and product diversification can help lower costs and manage risks better.
Summing up the whole data analysis, best formula that comes to ones mind is rapid
scaling up of access via technology, literacy gains, and financial re-engineering of
processes.
Client segmentation is one way that would allow institutions to better tailor products to
client needs as well as reduce costs and manage risks more efficiently. Suggestions
include:
Use of traditional saving arrangements and rotating savings, like for example in
Philippines family house-holds were provided with Ganansiva Box to save their daily
savings; this was called piggy banking.
Smaller size products and bulk service to better attract lower income groups.
Literacy should not be a requirement to access financial services.
Innovative ways to reach customers such as decentralized operations, transaction at
door step, mobile units etc.
Lastly, REACHING OUT TO WOMEN due to their abilities to better manage debt, their
stronger saving patterns and client loyalty present an untapped profitable clientele base
for HMB. Understanding women needs more precisely and reflecting those in the
financial products would ensure an increase in women's financial.