Small and medium enterprises (SMEs) are considered risky clients by most formal sector lenders since their financial health is weak and they are not good at managing risks and are expensive to lend. However, BRAC Bank has a different story to tell.

In 2001, the private commercial lender started its journey with the vision of providing banking solutions to unbanked SMEs, the backbone of the economy. Two decades later, its enthusiasm about the segment has not faded.

"We have become better at managing the SME business, finding solutions, and understanding and lowering the risks," said Selim RF Hussain, managing director and chief executive officer of BRAC Bank.

Selim RF Hussain

He spoke during an interview with The Daily Star recently as the bank is set to celebrate its 23rd founding anniversary on July 4.

"Majority banks are afraid of SMEs because they present higher risks, it is expensive to lend to them, and the NPL ratio in the segment averages double-digit, which is a no-go," he said.

The non-performing loan (NPL) in the SME segment is low at BRAC Bank thanks to the years of experience of dealing with them and learning how to do it better, according to Hussain.

"This has not happened overnight. We have invested heavily in people, process and technology."

Hussain said when he joined the bank as the managing director and CEO in 2015, the NPL ratio in the SME segment was close to double digits. It has gradually come down over the years.

It registered a record 35 percent increase in profit to Tk 827.50 crore last year.

Hussain, who attained the bachelor's degree in accounting from the University of Dhaka, and an MBA from the Institute of Business Administration at the same university, thinks SMEs will not be affected by the growing interest rate because the lending rate constitutes a small portion of their total cost.

"We understand SME clients better than any other banks in the country. They want timely credit access and don't bother about the interest rate."

The private sector bank plans to grow its lending by 30 percent in the SME segment, 20 percent in the corporate segment, and 10 percent in the retail segment this year.

He said BRAC Bank is fixing interest rates on SME loans considering the issue of whether borrowers will be able to pay back and are not facing any losses in their business.

Since the central bank adopted a market-based lending rate regime in May this year, interests have soared and gone past 14 percent. It was capped at 9 percent for more than three years to June last year.

"Interest rates have not surged above 14 percent for any types of loans at BRAC Bank," said Hussain.

Under the leadership of Hussain, the bank's deposit base as well as lending have widened.

BRAC Bank ranked 14th in deposit mobilisation among private banks in 2015. It has now climbed to third place. Presently, it is placed fourth in terms of loans, up eight notches from 2015.

"We have grown 25 to 30 percent annually in the last three years," the CEO said.

"We have a strong growth strategy, and in the next five years, we will grow at the same rate. We will be the largest private sector bank in the next five years."

According to Hussain, good governance is the key strength of the bank. "We are the highest-rated bank in the country as per the assessments of international rating agencies."

He also spoke about the digital transformation of BRAC Bank that began in 2019. Recently, it appointed a digital officer to enhance digital capability.

The bank has adopted a hybrid distribution strategy. It serves customers digitally through apps, call centres, automated teller machines, and cash deposit machines. Its physical outlets include branches, sub-branches, and agent banking booths.

Its retail banking app "Astha" is considered one of the top applications in Bangladesh.

"In the future, banks that have no digital capability will not be able to do banking. All banks must enhance their digital capability in the next five to six years to stay in the business," Hussain said.

Also the chairman of the Association of Bankers Bangladesh, the platform of CEOs of banks, Hussain thinks NPLs are the biggest challenge to the banking sector.

"In order to bring down NPLs, we must recognise the problem first. It will not be right to sweep them under the carpet."

Default loans in the banking sector hit an all-time high of Tk 182,295 crore in March.

Hussain said the bad debt provisioning system was relaxed in 2019. It was elevated to the international level in September last year. "This has been a major reform in the banking sector."

He also welcomed the central bank's recent reforms, freeing the interest rate and making the exchange rate almost market-based.

The central bank introduced a contractionary monetary policy, and the government has presented a budget whose size has not increased in line with historical trends.

"Amid the high inflationary environment, the moves have been appropriate. They, however, could be initiated earlier," Hussain said.

"Inflation has stayed at an elevated level for a long time, adversely impacting people's purchasing power. Inflation will have to be brought down at any cost."

Hussain said businesspeople benefited from the lending rate cap unveiled in April 2020 because the actual lending rate was zero owing to higher inflation.

In certain cases, it overheated the economy, fuelled inflation, and caused capital flight, he said, adding that since loans could be availed at cheaper rates, funds were laundered.

The CEO of BRAC Bank said raising the cost of funds is the right approach to combat inflation, but the asset and liability management should be strong.

"Banks have responsibilities, and they should have a proper strategy to fix the deposit and lending rates."

BRAC Bank is a member of the Global Alliance for Banking on Values (GABV), an international network of frontrunner organisations and leaders in the banking industry that use finance to serve people and the planet. It is the only active member from Bangladesh.

"It will be difficult to tackle the impacts of climate change without sustainable finance," Hussain added.