Non-bank financial institutions are gradually becoming self-sufficient in mobilising fund they need to run business thanks to liquidity crisis the country’s money market witnessed in 2012.
The money market faced serious liquidity crisis, making the call money rate frequently volatile and causing pains for the FIs to collect required fund, industry insiders said. The FIs have often been blamed for the volatility.
Earlier dependent entirely on the banks to borrow money, many of them by now graduated into their comfort zone in terms of funds, industry insiders said.
The then liquidity crunch has opened the eyes of the FIs and helped shift their business strategy from previously higher borrowing cost and increasingly competitive business environment, executives said.
At least one company now meets 90% of its fund requirement from own deposits. The development emerged in more than one year period before the money market becoming liquid again most recently.
“When liquidity becomes tight, the NBFIs suffer because their borrowing rates go up and funds become scarce,” said an executive.
Though at present liquidity situation has improved, borrowing cost is still higher. The NBFIs still continue to avail other traditional sources of fund whenever they become cheaper.
IDLC Finance was first to find the newer-for-them source of fund with a focus to become self-sufficient. They started the effort three years ago. Lanka Bangla Finance, Prime Finance and Investment (PFI) Ltd and United Leasing Company are among others joined the bandwagon.
“It’s time to change business strategy,” said Asad Khan, president of Bangladesh Leasing and Finance Companies Association and Managing Director of PFI.
In an environment where the traditional funding source from banks almost dried up, the company decided that efforts to mobilise funds from non-banking sources had to be stepped up, he said.
PFI has partially moved away this year from the capital market operation and focused on the core business.
“2012 was a bad year for both banks and FIs when liquidity was short for most of the first half of the year and interest rates sky-rocketed,” he said.
“IDLC decided three years ago to move away from the bank borrowing and initiated its own deposit marketing efforts,” said Selim RF Hussain, managing director of IDLC.
“Today 90% of all funding of IDLC comes from customer deposits and we can easily increase this to 100% if we wish.” Lanka Bangla Finance also sharpened its focus on various strategic priorities, including cutting down dependency on the money market.
“Some 60% fund now comes from our own deposit and 40% from banks,” said Managing Director Mohammed Nasir Uddin Chowdhury. “But source of funds depends on changing situation. The company prefers to more fund from banks, when it finds cheaper rate of interest.”
In an increasingly competitive environment, he said customers’ expectation will continue rising, financial institutions will only be able to effectively manage the cost of intermediation by leveraging the economies of scale.
Criteria of licence restrict FIs from doing certain kinds of business like foreign exchange transaction that commercial banks do.
Till the year 2011, the overall condition of FIs in Bangladesh was good. Although in the year 2010 the sector faced a little bit difficulty, the sector maintained growth.
Since 2012, situation of the sector has taken a negative turn as fund sourcing from the banking sector has almost stopped. The banking sector itself ran short of money, making them unable to supply fund in the area.
NBFIs suffer the most due to liquidity constraints because they do not have huge daily transactions as the banks do.
“Though liquidity situation eases this year, borrowing cost is still relatively higher,” said Akter H Sannamat, managing director of Union Capital.
Analysts say changes usually take place when existing business pattern stops delivering the desired results and the business needs to improve performance.