Declining Returns from "GIMMICKY" Banking

19 Oct, 2002

Of late, the global banking industry is struggling not just from bad lending and investments of the past; but also to innovate constantly to ward off the ever-increasing competition from within and without. In some instances, however, this has assumed the form of imitations (the best form of flattery!) of the methods that FMCG and the hyper-aggressive consumer product companies adopt as promotional activities. During the earlier part of the last century, banking was not under much competition-induced pressures. It had a 'boring' image; arrogant, exclusive and stiff upper lip style; and regarded as the privilege of the pin-striped individuals, who flaunted elegance, affluence and maturity to inspire trust. They believed in discretion and the classic British under-statement became the global norm. Then came the Americans with their 'consumer- banking' and retail banking tactics. They went to town with their aggressive pursuit of retail loan customers and gradually this extended to the whole gamut of credit and charge cards.

Some believe that retail may now have gone totally 'overboard' in some respects; particularly in the region. What we are now witnessing in the region is a cut-throat competition in the retail space, where each bank is splashing colourful adverts and spots in the press and television and sponsoring promotional activities. They are also offering anything and everything to 'hook' in the customers. Such promotional enticements include waiving of certain loan instalments, lower interest rates on cards and loans, gifts galore e.g. airline tickets, hotel stay etc. Credit card promotion has almost taken a bizarre route, not just with air miles, but with airline tickets thrown in. All this expensive extravaganza is becoming possible because of the high profit margins that are available on retail loans and credit cards. One bank had the temerity a year back to advertise that 'your loan is forgiven' by announcing a raffle at the end of which, the winner could write off his loan.

Others routinely and regularly use festive occasions to defer or forgive loan instalments. These are tactics that would be frowned upon in many mature economies.

The sheer consumer-spending boom, if ballooned will mean that most salaried employees and businessmen will forever thrive and live on credit; from cradle to grave. This retail binge has therefore, become a mania, sweeping most parts of the world. Commercial banks find that in corporate loans and industrial finance, they can take huge hits to their bottom-line profitability if they have even one or two loans go sour or default. It is not so in retail, as it is made up of a series of short-maturity, small amount exposures. They can therefore liberally and generously make a 2% / 3% loan loss provision on a portfolio basis and the default or loss ratios have generally stayed within that range. Even a 5% loss can be comfortably borne, given that the spreads in these loans can be ramped upto to 7% p.a. The banks have thus laid out huge advertising / promotional budgets and have thrown in a lot of raw but energetic salesmen on the job; 'feet on street' approach. The retail customer acquisition process has also been simplified in terms of account opening or giving of credit cards. Some cynics may say that it has assumed the form and content of a summer discount sale promotion, such as the Dubai Shopping Festival; excepting that this one is all the year round!

The purists in banking do find all this somewhat repugnant to their ethos. Of course the more modern, Americanised / globalised individuals take this in their stride; shrugging off the phenomenon as necessary hype, in a crowded market; where you have to shout to be heard above the din or place full page adverts to grab attention. This is another case of crass commercialism gone amuck as some say and one that could ultimately become a zero-sum game.

If only a few banks did this ramp-up (usually the likes of Citibank have been in the forefront), then they can quickly garner a huge market share to justify the costs. But as others come in and adopt the same aggressive tactics and extravagant promotions, then only the customer ends up being delighted with the choice to play one bank against the other!

He can also acquire multiple loans and all the benefits that go with them. As soon as a new promotion comes along, he can switch banks again! So the loyalty of the customers to the concerned banks tends to be limited, except perhaps in the case of loans. But even there, some banks are prepared to 'refinance' existing loans and wean away customers.

Without wishing to condemn these practices as being akin to regional 'circus', what is needed is for the banking supervisory authorities to regulate retail foray; in the best interests of the customers / public at large including laymen. For instance, factually incomplete advertising and hyped up offers, need to be curbed, so that the customer is not promised or tantalised with something that is not actually being delivered. The regulators in this region seem to allow a lot of laissez-faire in commercial promotion by banks, particularly in the UAE; not found elsewhere. The second important factor is for the Boards of Directors of these banking companies to lay down and monitor clear limits as to the quality and pricing of the assets. Yet another vital building block is the establishment of a credible credit information bureau that can track individuals and their overall borrowing / leverage factor. The social impact of heavy personal lending needs to be studied by the authorities i.e. a person acquiring several credit cards, taking personal and car loans from different banks and as a result piling up debt much in excess of his ability to service it from his salary or his regular monthly income or even his wealth, can lead to serious social problems. The regulators can and should rein in the banks. But better still is self regulation by the banks and the financial institutions themselves. Non-banking (e.g. car finance) companies that indulge in excessive loan and leverage build-up ought to join banks in drawing up guidelines that all the members of the Retail Forum should follow on a voluntary basis.

Ultimately, banks and financial institutions are part of any society / country's body politic. If there is a deliberate and well-considered move towards consumerism, to stoke up the retail markets, the banks as intermediaries in the business of financing and lubricating / providing the monetary liquidity in the system, ought to be supportive. It is not right or wise to preach lessons to the banks or hit the high moral ground by saying that consumerism per se is wrong or unethical.

All pendulum swings in the markets will find their own balance in course of time. "If success comes from excesses, it can only be short-term". The golden mean is in achieving a sensible mix of helpful consumer-financing; while curbing extravagance and excessive consumption. This will lead to a more healthy environment within a country; of which the banks will be the prime beneficiaries. They have therefore, a vested interest in working towards a stable economic milieu; in which the credit component remains viable and vibrant.

(The author (sureshk@emiratesbank.ae) is a General Manager in Emirates Bank Group. The views expressed in this article are not necessarily shared by the Bank.)

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