Determining interest rate and digitalisation of credit risk management

Bangladesh Bank has constituted a high-powered seven-member committee, headed by its Deputy Governor to prepare a report on probable strategies and action plan to bring country's lending rate to single digit. It set Jan 01, 2020 as the deadline to make single digit lending rate effective.

This type of directed attempts to reduce bank's lending rate is not new in our country. This exercise was carried out on several occasions during the last two decades. All attempts failed to bring down lending rate and in some cases, these  even made adverse impact on the financial industry. Year 2004-5 is a glaring example: during that time attempts to forcefully reduce interest rate boomeranged resulting in acute liquidity crisis that eventually skyrocketed call money (inter-bank borrowing) rate to above 50 per cent. So, this time, to what extent the high-powered committee's recommendation can produce desired result remains to be seen.

IMPACT OF INTEREST RATE CHANGE: Interest rate is the determinant of some economic and non-economic factors and as such market forces determine interest rate. Prudent action on factors determining interest rate and reducing the cost associated with managing asset liability, particularly loans and advances, can contribute to reducing the cost of fund and lending rate. First of all, the actual reason of high lending rate needs to be identified and then, measures should be taken to gradually resolve those issues.

In our country, lending rate is determined in a conventional way by adding the spread set by the central bank to the cost of fund calculated by bank's treasury department. At the same time, interest rate on deposit which is the major source of bank's funding, is historically high which also accounts for bank's high lending rate. So, reducing lending rate has direct correlation with reducing deposit rate. Reducing deposit rate may act as a discouraging factor among the country's savers who may divert their hard-earned savings to other areas of risky investment. This measure may cause dual impact in the economy and society.  Because of this measure, country's financial sector may experience liquidity shortage as our lenders mostly rely on savers for their source of fund which is mobilised in the form of deposits bearing various interest rates.

Lenders' alternative source of fund, preferably effective bond market, has not been developed in the country as yet. At the same time, there is the possibility that a good number of people who are known as core savers in society may lose their hard-earned many because of investing in the risky areas. Therefore, deposit rate is very sensitive in our society where state-sponsored social security system is absent. In the developed countries which are always referred as the place of abnormally low interest rate, social security is ensured by the state and therefore, people do not care about deposit rate, rather spend lavishly and also invest in risky ventures. Without considering the whole gamut of the developed countries' society, if only low interest rate is taken as reference and applied in our country, the overall situation may get chaotic.

Trading-off between maintaining standard deposit rate and lowering lending rate is a really very challenging task and success thereof completely depends on efficient manoeuvring of the factors determining these two rates.

INTRODUCING DIGITAL CRM: In our country, credit management is done through a conventional method that includes initiating paper-based credit proposal which then is submitted to CRM (Credit Risk Management) department of the bank's head office where paper-based analysis is carried out to prepare another paper-based memorandum for adjudicating team who may be senior management or Board of Directors. The procedure is inordinately lengthy as well as cost-consuming. Digitalisation would smoothen the entire process.

CRM DIGITALISATION PROCESS: Computer software/application is required to convert entire credit management process into digital platform. Every activity related to credit -- ranging from initiating marketing/sale's drive to the analysis, adjudication, documentation, disbursement and finally recovery -- will be carried out through online platform. Only legal documentation and execution of some basic and charge documents are required to be done through manual process.  Major part of this task can also be carried out through online system if e-signature is allowed as legally acceptable endorsement. Under this online platform, there are several windows to work viz., one for branch or sales team, one for CRM, Head Office, one for adjudicating team, and one for credit operation/administration team. Each window will have separate viewing and functional options providing common sharing options for basic information.

A separate online application/portal will be used for customer connection where interested borrowers will be provided access with confidential user ID and password. In this portal, only pre-qualified borrowers and branch officers and or sales/marketing team will have access. Borrowers will use their online platform to submit the borrowing request and other necessary information as well as supporting documents as required by the bank. For large and syndicated loans, separate and independent online application can also be used by the business community for selecting lender party through online bidding process. Reputed IT companies can establish this type of online loan bidding platform.

In order to maintain strict confidentiality and avoid any scope of data breach, two separate online applications will be used of which one is exclusively for bank's internal use while the other is for communicating with prequalified customers. Customers will have option to view their own accounts only with minimum input options which is similar to regular online banking.

Some may argue that this online CRM process may expose security concern, particularly online hacking or data tempering which is a common threat in the digital world. If appropriate measures are taken and adequate controls are in place, this online application will have no or very minimum operational risk and can bring revolutionary change in country's credit risk management. This will not only help reduce lending rate considerably but also improve efficiency of bank's credit management.  

After introducing, online Credit Risk Management portal and online borrower application, marketing/ sales drive should be undertaken to prequalify the borrowers as bank's good prospect for lending. Only prequalified borrowers should be provided valid access in this application. For the sake of better management and making the system foolproof, the selected borrowers will designate only two/three officers who will be given user ID and password to log on this system. Bank will have complete control and administrative authority on the use of the online borrower portal. Using this portal, borrowers will submit their intent of borrowing or funding request which will be immediately notified to the concerned relationship manager or sales team through the same system and additional email notification. At this stage, the CRM or sales team will conduct preliminary analysis to determine whether the borrowing request falls within bank's risk appetite and regulatory rules and regulation. If CRM/Sales team finds borrowers intent viable in every respect, the borrower will then be invited to submit detailed proposal with all necessary information as well as supporting documents using the same portal.

Nironjan Roy is a banker based in Toronto, Canada.

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