Some lessons from COVID (Part 1)
Digitalisation is largely a good omen and it will be foolhardy to ignore its relevance to modern-day banking, be it back-office operations or the way clients interact with the bank’s products and services.
While driving to work one early morning, a song by Ronnie Millsap, “The Future is not What it used to be,” announced itself on my playlist. As I listened to the lyrics of the song, many things came to mind. The song’s title, for most people, would translate into things dull and adversarial with all sorts of negative connotations.
Not for me. Life is simply a university that has many lessons and it is in the natural order of things to get disrupted and even uprooted. We therefore need to keep on adapting, shifting gears and doing things differently in order to survive. Ladies and gentlemen, that is the life of a banker.
Banking by nature is a fragile and fickle undertaking that is likely to be affected by the performance of the economy and the well-being of other sectors. A report by the IMF titled “The Federal Democratic Republic of Ethiopia: World Bank,” points to the fact that with regard to the banking sector, two critical effects of the pandemic are underscored: deterioration of asset quality and chronic liquidity problems. The COVID-19 pandemic will have an effect on both the balance sheet and income statement of banks.
In our local context, we have witnessed most banks reporting a drastic decline in their overall profits, all linked to the pandemic. Although banks are exposed to the same macroeconomic factors, we have also seen a surprise or two when some banks reported positive growth. By and large, COVID-19 has thrown a spanner in the works for most banks. The future is no longer what it used to be because as bankers we now need to come to the realisation that COVID-19 has presented us with a forced opportunity to think and do things differently in order to preserve the industry, our existence in it and remaining relevant to our customers in responding to them, as well as their needs and the challenges they face.
My view remains unchanged. For banks that still want to swim against the tide, the natural progression of things will not offer any favours because demise is the most likely outcome. Here are some of the aspects affecting banks today and my thoughts on how we should respond in order to stay afloat and remain bankers for all seasons.
Digitalisation is largely a good omen and it will be foolhardy to ignore its relevance to modern-day banking, be it back-office operations or the way clients interact with the bank’s products and services. With the emergence of COVID-19, banks are ensuring that despite the many restrictions, life has to go on and customers are still able to keep an eye on their finances and interact with the custodians that the financial institutions are. Yet we have a certain legion of people getting left behind as they cannot keep up with the changes and are getting frustrated on the sidelines.
According to Statistics Botswana, over 4.5 percent of our country’s population is over than the age of 65 and about 13.1 percent of the population is not literate. The quest to fully digitise has become a nemesis for these because they are completely shut out. Aggressive and concerted efforts are therefore needed by banks to at least bridge the gap and accommodate the currently disadvantaged. Even with our literacy level as high as 86 percent, the level of product penetration of digital channels across all banks suggests that there is still a lot of work to be done. Perhaps we bankers need to eliminate product pushing and bring customers closer to our products and services right from conceptualisation to realisation.
It is known fact that some of banks’ clients (retail and institutional) have been hit really hard as seen by a reduction in their income, thus creating a number of problems for banks as well. Almost immediately, some banks faced serious liquidity issues as there are less deposits from clients. On the flip side, still due to reduced or low income from clients, banks faced a problem of Asset Quality Problems. Clients fail to meet regular instalment obligations as agreed with their bankers, thus skyrocketing rates of default. Soon-to-be customers, existing clients looking at new credit facilities or additional facilities and credit facilities from their banks are also not spared. Both liquidity and asset quality problems quickly become determinants of banks’ lending appetite and generally lead to reduced credit growth. This is due to not enough deposits to finance loans and only those who are deemed low risk are then financed while the rest cannot access credit facilities.
There is certainly an opportunity to do things differently. My observation is that some of the problems are basically perpetuated by banks’ processes and policies. Banks from time to time should adjust parameters, given the current situation faced by their clientele. For example, in these tough times, it is extremely important to always have multiple sources of deposits and have the book adequately funded. There is a bias towards institutional clients and a neglect of retail clients. Banks are always more accommodating to the former and not the latter because of ticket sizes involved.
Exhibit 1, regarding account dormancy rules, institutional clients find it easier to convince their bankers to keep accounts active despite them not making regular deposits as stipulated in their account specifications. The reality is different from individual retail customers. Moreover, most banks are still hesitant to adjust their dormancy rules to accommodate customers, although the writing is on the wall that there is not enough cash for savings and investments but to keep the light on and food on the table. Retail customers then end up having their accounts closed as they are no longer in line with bank’s requirements. Banks should be flexible in this regard in order to prevent further loss of deposits and help their liquidity status. Prolonging the account activity status would definitely go a long way in these tough economic times.
Look out for Part 2 next week as I discuss some more lessons.
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