Business

Wednesday November 4, 2009

Banks should look beyond brick and mortar

Plain Speaking - By Ya Leng Kuen


SOME of the Budget 2010 measures have put the business of banking and the reliance of some banks on traditional sectors, such as property and credit cards, in the spotlight.

Banks whose bread-and-butter businesses are in lucrative credit card margins and stable mortgage loans, funded by a large deposit base, should start thinking hard about moving gradually away from these “safe” segments and penetrate new growth areas.

They have to move one step ahead in preparation for the economic transformation which involves the high-income model and the development of new growth areas in sectors such as services and green technology.

Banks really have to start charting the kind of support services that they can provide, especially now that the banking sector is in a stronger position to take on these new challenges.

The roles played by investment and commercial banks in financing the next stage of growth will be crucial, as will be the enhanced framework for risk management, corporate governance and board oversight.

Malaysians have over 3.5 accounts on average, more than Americans, Italians or Spaniards, with commercial banks dominating the provision of deposits

Many of these new areas carry an element of risk-taking, however, banks here are not expected to overgear themselves without proper board oversight, as was the case with credit derivatives in the West.

It may not just involve bank loans (which is still an important growth indicator) as there are other avenues of funding now such as bonds and venture capital, nevertheless, the banking sector as a whole should be among the first few to proactively get involved in the new economic model.

The time is right for the next big step.

Data revealed in The Economist over the weekend indicated that despite the popular notion that richer countries would have more deposit accounts per person, Malaysians had over 3.5 accounts on average, more than Americans, Italians or Spaniards, with commercial banks dominating the provision of deposits.

The World Bank’s annual Doing Business report for 2010, released on Sept 10, showed Malaysia scoring top marks for the strength of legal rights index (indicating that laws are better designed to expand access to credit) and also for the depth of the credit information index (indicating that more credit information is available from a public registry or private bureau).

It is good to be reactive and responsive to customers’ needs but much of the future is also shaped by the acute foresight and forward planning of top strategists at banks.

A possible feature of the high-income economy could be a flourishing capital market, where bonds, foreign exchange and interest rate swaps are currently enjoying good business.

However, that is improved income for the banks themselves as a component of the services industry.

In terms of providing access to financing to all, there could be bolder steps to help more businesses further revive their credit lines and obtain greater credit flexibility.

The Government has shared the risks and provided a lot of support to loans growth but after all these efforts, loans growth stood at only 7.2% in September compared with 7.3% a month earlier.

Questions have arisen as to why the banks still appear so cautious despite the growing optimism over economic recovery.

Analysts reckon that a loans growth of 8% to 10% would indicate that banks are more prepared to play a more robust role in encouraging the private investments that would help achieve the high- income economic model.

The credit card and property taxes could be a sign of more taxes to come, especially in the high- margin segments of the business.

So, the faster banks move away from their cosy spots, the better off they will be.

Banks should make sure that while they ride the new wave, they can claim back on the risks taken.

● Senior business editor Yap Leng Kuen hears that banks can always replicate their traditional brick-and-mortar businesses elsewhere in the fast growing emerging markets. However, the challenge is always to make good on home ground to ensure future survival.

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