Faster foreclosure system must to foster banking - An interview with Atif R. Bokhari, President & CEO, United Bank Limited

This interview takes the reader through a conversation with Atif Bokhari, President and CEO of UBL Pakistan. The CEO speaks about the much-pondered issue of financing of long-term projects, and that of the SME sector. He also discusses in detail the rise and fall of consumer banking in Pakistan and the reasons thereof, and speaks of UBL's far-reaching presence in branchless banking.
BR Research: DFIs haven't been venturing into long-term financing, whereas banks' deposits are skewed towards short-term; in such a scenario do you think that long-term projects would suffer from lack of financing?
Atif Bokhari: The space left by DFIs was taken up by commercial banks completely. Agreed that in the last 15 years, the liability structure of banks has been skewed towards the short side, but irrespective of that when you look at the late 1990s and the early 2000s, long-term projects were being financed easily.
The entire power projects were financed by commercial banks; we are looking at 15-20 years of repayments. Fatima Fertiliser and other mega projects came in and banks financed them. So the mismatch on the balance sheet has never precluded commercial banks to go for long-term financing; it is just that you need to come up with viable long-term projects.
BRR: What in your view is keeping the private sector at bay from big projects?
AB: Monetary Policy is currently very tight -- though I don't disagree with it.
But when you are talking about financing a blue chip company, I won't be able to do anything less than 2-2.5 percent over KIBOR, whereas at 16.5-17 percent long-term viability is difficult to sustain for the private sector. Couple that with the prevailing political risk and uncertainty, and the private sector will naturally shy away.
BRR: Banks tend to focus on big ticket corporates whereas they should be focussing on the SME sector?
AB: To a degree, there is an element of name lending in this market. However between 1998 and 2003, there was substantial growth in terms of new names and large exposure being taken in what you call second tier borrowers. And I tell you that a majority of those were wrong calls by banks, because second tier was not adequately capitalised to sustain an economic downturn.
There is an element in this country where people have the ability to pay back but they lack the will to repay. People are very short sighted especially on the SME side. They would rather save a penny by not paying up banks' principal and interest, but would not think of the pound they lose by destroying their credit rating.
BRR: But don't banks have any recourse to law?
AB: Today the defaulters choose to fight in courts, where it takes on average 15 years to get a decree and an execution, and for 15 years they get free use of banks' money. So getting into litigation is actually the best thing for the borrower, because he doesn't have to service anything during that time. If there were sufficient laws on bankruptcy, you wouldn't see these things happening.
If somebody has defaulted, and he does not have ability to repay, it does not mean that bankers want them to be in put in jail. We just want that person to hand over the assets to us so we can sell them to somebody who can run the business better.
BRR: Does that mean that UBL has shied away from the SME segment?
AB: No, I am a firm believer that if we don't focus on and develop the SME sector, the economy will never grow. You will never grow through the 15-20 large groups, which are the largest manufacturers.
But at the same time you have to look at the track record of SMEs. SME portfolios of nearly all the banks have a default rate of more than 25 percent. You can't survive as a bank with 25 percent default rate.
Still, at UBL we continue to service the SME as well as the consumer segment. We can't just walk away from a particular sector in the economy, because we feel that we have a certain responsibility to this country.
BRR: Have the banks taken up this issue with relevant authorities?
AB: Yes, these issues have been taken up at various forums and all we seek is early resolution on court cases.
BRR: What are the lessons to be learnt from the consumer asset boom?
AB: You see Pakistani bankers were mostly corporate bankers; consumer banking was not their forte. There was only one international institution that had launched consumer banking, and a large majority associated with consumer banking in any bank in Pakistan had been trained by that institution.
So they all had one fixed business model and implemented the same model without knowing it fully well and how it would pan out. We just started following one model blindfolded.
BRR: What was exactly wrong was the model?
AB: The model was based on direct sales, which made sense for a bank with a limited branch network and hence needed a large direct sales force. Unfortunately, we did that too, because all consumer bank heads said that 'no other model will work'.
In hindsight, why should I have a direct sales force of 5,000 people when I have 1,100 branches? It is logical now, but at that time it wasn't.
BRR: So the KYC model would have been much better?
AB: The problem with the direct sales model is that salesmen are only bothered about commissions; a lot of these salesmen weren't actually bank employees, so they carried applications of 5 or 6 banks, and would sell any one of the banks' products depending upon what the customer wanted. They had no loyalty.
BRR: How did this herd mindset affect the industry's costs?
AB: The banks started competing so aggressively that the cost structure just went haywire; an officer of Rs50,000 salary per month would demand double that salary within the first three months -- saying that if you don't double it, then I will go to XYZ bank.
Suddenly, young officers with just 2-3 years of experience started demanding the title of Vice Presidents and a salary of Rs500,000 per month. So, we got blackmailed by people who were in fact mostly salesmen rather than true consumer bankers.
Secondly, product wise, everyone got into the game of who is going to make more sales. They started a competition; if one bank sold 5,000 cars a month, the sales heads of other banks would say we must beat that target; so quality was ignored and it totally became a sales driven exercise.
BRR: How do you see the consumer segment growing over the next 5 years and what model would you follow now?
AB: When we started downsizing our consumer business, we did an exercise called Proxima, which was basically reengineering and reorganising of our branch network.
Our acquisition numbers in consumer are down, but whatever we are acquiring is very good quality. We are looking at a default rate of less than 5 percent on our new portfolio. I would rather have a reduction in acquisition rates than see my default rates go up.
BRR: But at the end of the day, isn't it the credit policy wing that is responsible, whether you follow the direct sales model or the branch model?
AB: We follow a scorecard system of analysing applications; we used to do that in the direct sales model and we will continue to do so in the relationship model or branch model.
In the branch model, the relationship manager is responsible for bringing in quality customers, so if tomorrow the loan goes bad he is responsible. It may be not be UBL's client, but at least the relationship manager knows the client.
BRR: What makes you believe that the branch model will work?
AB: Well, the jury is still out whether this model will work in the long-term, because you have to have a certain amount of acquisitions a month to at least break even on the business. But again, at UBL, even if our consumer asset segment ends up as a loss leader for the next 10 years, we will still continue doing it. We are not going to walk away from it.
BRR: How would you re-strategise your commercial business as regards SME lending?
AB: The problem was that as banks moved directly from corporate to consumer; we missed the commercial and SME sectors in between.
But now at UBL we are going to increase our workforce in commercial lending by somewhere around 100 percent in 2011.
A relationship manager on the SME side handling around 30 or 40 relationships cannot have healthy interaction with so many clients. So we are going back deeper into the relationship model, because only that will work; we will rationalise the number of relationships that a person should be managing. Ideally it should be around 15-25 depending upon the size of the portfolio.
BRR: How do you plan to make good use of your branch network?
AB: We are moving towards what we call retail banking, which encompasses practically everything. It is inclusive of the branch network, commercial assets, consumer assets, insurance, mutual funds and so forth.
Our biggest strength is our branch network; and so everything should flow through it. We have also added around 15-17 Islamic banking windows within our conventional branches.
BRR: Isn't Islamic banking a separate business?
AB: It may be a separate segment, but it comes within the retail segment, I don't want to add Islamic banking branches in every city when we can offer Islamic windows in existing branches. This was all part of our Proxima exercise three years back.
We understand that today our most marginal branch is making money, because low cost deposits are placed in high yielding government securities. But, if and when interest rates ease to 6-7 percent, a lot of branches will start making losses. So we need to ensure that our branches don't just act as liability gatherers but also as revenue centres.
BRR: Farming economy has seen a boom of late. Why don't banks, especially the big banks, venture aggressively into agri lending?
AB: Most of the agri lending is in Punjab; banks don't tend to go to Sindh because of lack of documentation. Since Sindh has not been able to computerise its land records, bankers can't go about lending to farmers, even if the relationship manager knows that a certain person owns certain land.
The second issue is that we need to set up warehousing facilities; if you are a small farmer, you sell your crop to the 'aartis', who buy crop futures at substantially lower rates than market price.
If you have warehousing capacity, banks will increase agri lending because we will have a sense of security on the back of warehousing receipts.
Agriculture can be better promoted through private sector regional banks with limited geography. Unfortunately when we gave out banking licences, it was on the model of the big 5 commercial banks, which doesn't work for everybody.
BRR: Why don't banks provide banking services to the 'aartis'?
AB: 'Aartis' don't want to deal with banks; they are totally undocumented. About 60 percent of the currency-in-circulation is in the agricultural sector - and almost all of it is undocumented.
BRR: UBL is the first commercial bank to start branchless banking. What are your growth plans, and how successful has been the experience?
AB: Today we have something like 2,000 agents, we will ramp it to 20-30 thousand agents in the next 12-18 months.
For UBL the project has been quite successful; who could have ever imagined that IDPs of Swat, who had no exposure to banks, would start using debit cards and point of sales terminals. We did about 0.4 million cards in a space of 45-50 days. We did the World Food Programme and now we have done the Watan Card. A total of 1.3 million cards have been issued in the Watan scheme, of which UBL has issued 1.0 million.
BRR: What is the secret behind the success of branchless banking - especially in terms of disaster management?
AB: Branchless banking is the cheapest form of distributing aid. For any aid agency, the cost of delivering aid to the needy is something around 15-30 percent. It's the international norm without any corruption.
On the other hand, the cost of delivering aid through these cards is less than 5 percent whereas in the case of IDP, it was less than 1.5 percent. The cost of Watan Card is around 3 percent.
Secondly, ours is a home-grown technology, whereas other banks opted for technology from international vendors, which costs a lot. Basically, we started working on this product called UBL Orion about 5 years ago; the project wasn't very successful, but the learning gave us a head start.
Having seen our success, a couple of private equity funds want to buy our technology for regional implementation.
BRR: Would you sell the technology?
AB: Absolutely.
BRR: Any plans to acquire a small bank?
AB: No. The acquisition has to add value and I don't see any small bank adding value. Small banks don't have any strength to bring to the table.
BRR: So what should small banks do to survive?
AB: They should merge. If they continue to do traditional banking they will always be caught up in the catch-up game to get to the right size, increase their branch network and so forth. And for that the shareholders will have to keep pumping money.
Instead the small banks need to develop specialisations, like trade, agriculture, SMEs, investment banking and so forth.
BRR: Do you think that MCR is a good measure or the capital adequacy ratio?
AB: There has to be a right mix of MCR and CAR.
BRR: What's your view on NPLs?
AB: The major area that I am concerned about is the value added sector. But I don't see any significant impact on the NPLs. The worst is behind us.
BRR: What's your interest rate outlook?
AB: The way things are going inertest rate will likely remain high throughout 2011.
BRR: UBL recently did a transaction in Yemen; can you share its details?
AB: It was our first offshore syndication transaction - a 5-year $20 million syndicated Term Finance Facility for Hadramout Investment Power Company to part-finance a 75 MW power plant in Hadramout Region in Yemen.
The project will supply power to Yemen's national electricity transmission and distribution company as well as the sponsors' steel plant. UBL acted as Investment Agent of the transaction in addition to being the exclusive Financial Advisor and Arranger to the client.
The transaction marks the first ever funded syndicated facility in Yemen with participation from 5 local and foreign banks including UBL, Tadhamon International Islamic Bank, Cooperative & Agricultural Credit Bank, Arab Bank and International Bank of Yemen.
BRR: Are you looking to increase your presence in foreign countries?
AB: Yes; we want to work with our strength that is the Middle East. Previously, we used to work on the Pakistan trade model. Now that we have a presence in all of Pakistan's major trade partners, we are looking at the Middle East trade model because that offers larger tickets. We are also planning to increase our presence in Africa, where in one particular country, we should get permission by June 2011.
Profile: Atif R. Bokhari
Mr. Bokhari was appointed as President and CEO of UBL in May 2004, subsequent to privatization in October 2002. Bokhari has 28 years of work experience, and prior to UBL, he worked for ICI Pakistan Limited, Bank of America and Habib Bank. He also serves on the Boards of United Executors and Trustees, United Bank AG Zurich, United National Bank, First Women Bank, Institute of Bankers Pakistan and Karachi School for Business and Leadership.