Basir Shamsie is President & CEO of JS Bank Limited. Basir has completed the Program for Leadership Development from Harvard Business School. He joined Bear Stearns Jahangir Siddiqui & Co. in 1994 in the Money and Bond Markets business. He was part of the core team responsible for acquisition of American Express Bank’s Pakistan operations in 2006 and its merger into JS Bank Ltd.
Basir has since been associated with JS Bank in various senior roles such as Group Head of Treasury, Wholesale & International Banking which he held till May of 2017. His last assignment was Deputy CEO, JS Bank. He has previously served as Chairman, JS Investments Limited and JS Global Capital Limited and Director of JS Bank Limited.
BR Research sat down last month with Basir to discuss things around the banking industry, with special focus on Covid-19, and the potential impact It carries. Below is an edited excerpt of the conversation.
BR Research: Under the current circumstances, what impact will COVID-19 have on the banking industry in general?
Basir Shamsie: The banking industry will see a lasting behavioral change. The traditional financial sector in Pakistan was primarily reliant on brick and mortar installations, i.e. branches and physical traffic. This model has been severely impacted because of limited ability to visit branches due to movement restrictions, need to avoid crowded locations and safety concerns.
The financial industry has shifted rapidly to a digital banking model in the wake of COVID-19 and beefed up mobile and internet banking offerings. Similarly, customers have rapidly adopted digital means to undertake and meet their banking needs. At JS Bank, we have witnessed the volume of transactions on digital channels increase by 30-40 percent, while customer registrations have also spiked.
BRR: The retail and wholesale industry has almost come on a standstill, even manufacturing industries will be facing similar pressures. How do you see this economic fallout impacting the volume of the banking business? Have you already seen such signs emerging?
BS: Bank lending in Pakistan is typically corporate and commercial centered. SMEs, which are the hardest hit, have a small share of the lending wallet, and consumer lending including mortgage is limited as compared to corporate lending. Unlike other markets where SMEs have a large portion of the overall bank borrowing portfolio, Pakistan’s financial industry have a limited exposure when it comes to small scale lending.
As far as the corporate and commercial borrowers are concerned, basic commodity players, like food products, rice, wheat, sugar and edible oil, will continue to operate as they are need based products. As we move up the curve, we get into the demand side for exporters. While there has been impact across the board, the garment industry has faced challenges. At the same time, the home textile segment, which constitutes a large chunk of exports, is relatively better off vs other garment offerings. Other segments such as real estate will also be impacted but as mentioned earlier, Pakistani banks have limited exposure in these segments.
BRR: Do you see any potential fallout in terms of domestic goods consumption? Assuming COVID-19 ends in a few months, do you see same buying patterns that were before COVID-19?
BS:: Domestic demand has been significantly curtailed and especially for non-need based commodities, such as garments. We generally see a high volume of market transactions in Ramadan, this year demand has been considerably more subdued as compared to past years. The reasons are quite evident in terms of market closures and reduced buying power on the consumer end, and we expect this to continue through to Eid.
BRR: What are your views about SBP’s strategy to deal with covid-19 crisis? The policies they have come up with, are they aimed at spurring demand or just to facilitate customers?
BS: The State Bank of Pakistan has been very active when it comes to dealing with the financial impact of COVID-19 in Pakistan. Their response strategy has been three-fold.
The first was managing customer concerns regarding access to and safety of funds. At the outset, they promoted the need to ensure that a full suite of banking services is available to customers. In addition, they have been active in promoting the usage of digital banking channels including waiving the biometric requirement for onboarding. I would add that JS Bank has been at the forefront of this effort and was the first bank to waive off transactional charges on all digital channels to facilitate and support our customers.
The second step was to help fight the coronavirus wherein a hospital financing scheme was introduced. All medical centers registered with federal or provincial health governing bodies, engaged in the control and eradication of Covid-19 will be eligible to avail the credit line at a minimal mark-up rate of only 3 percent per annum for a duration of 5 years. This enables health facilities to bolster their operational mechanisms through purchase of additional equipment and relevant tools for the purpose.
In addition, a payroll product was released allowing employers to ensure liquidity to finance salaries amid economic slowdown. The central bank also instructed banks to defer principal payments for loan products to release immediate pressure on customers and the economy. Lastly, the SBP revised monetary policy thrice, cutting the interest rate by 425 basis points, adjusting it to 9 percent.
These are all well-thought out steps which have served the purpose of protecting customer confidence, while laying the groundwork for future economic revival.
BRR: With regards to Temporary Economic Refinance Facility (TERF), you mentioned there is an opportunity for import substitution. Do you see any interest from entrepreneurs to invest in any of those areas or is it too premature to talk about?
BS: The demand for TERF in its present form for new business is low. If amended to include expansion for existing companies that were planning for capacity expansion, they may avail it. I believe, as the lockdown ends, and economy starts to open up, demand for TERF can be generated for import substitution.
BRR: You have talked about payroll finance; how much demand has your bank attracted in this category?
BS: We are glad to share that JS Bank is leading the payroll finance piece. We were the first bank to disburse the first case of payroll financing under the SBP scheme, as of 23rd April. In addition, of that date we have 33 cases approved with financing amount of Rs1.95 billion. We also make sure, along with the SBP that the payroll finance goes to the end user, i.e. employees.
We offer customers a digital payroll processing system where companies use an employee banking portal for disbursement of salaries. Almost all our customers for whom we process payrolls, have come up with financing requests to run their payroll for them, so that their employees are not affected.
BRR: Particularly discussing the payroll financing, there are companies who are cash rich and yet they opt to gain benefit from the payroll scheme and invest their own cash in T-bills or government securities. Do you see potential for misuse by companies?
BS: With any subsidized scheme, the risk of misuse will never eliminate completely. The SBP is also very keen that money is financed directly to the end-consumer. Also, banks are putting their own checks to lend payroll. Lastly, each bank is given a limit by the SBP to lend. Since the resources are limited, every bank will try to ensure that the financing reaches deserving borrowers.
BRR: Will deferred payments be a high risk on the bank's balance sheet as the interest rate is decreasing and there is no fee income coming up because of the lack of activities? How is JS Bank trying to cope up in these trying times?
BS: Due to the significant drop in the interest rates, core profitability of banks will take a hit. And, we are adding risk to our balance sheet to support our economy and our borrowers via enhanced lending for payroll, deferring repayments etc. We do not know how long the current situation will prevail, but banks in Pakistan due to their low loan to deposit ratios have enough liquidity and capital cushion for the near term.
If the current situation continues, then the central bank will likely use additional tools and release CRR to finance liquidity. As a first step, SBP has reduced the capital conservancy buffer from 12.5 percent to 11.5 percent.
BRR: Do you expect the economy to recover soon? The IMF report suggests that the World's economy will go down by 3 percent next year. The IMF further sees Pakistan's economy to fall by 1.5 percent next year. So, do you still see a V-shaped recovery?
BS: Looking at the revised GDP estimates, hope of a V shaped recovery is low. A U-shaped recovery is what we are hoping will happen, the future is fluid though and cannot be predicted with extreme accuracy.
As far as Pakistan is concerned, anytime there is a massive disruption, there are always opportunities. When coronavirus started to breakout in China, Pakistani textile exporters started to get orders. Even now there is a great opportunity due to global supply chain disruptions and need for diversification. Also, opportunities are being created for local manufacturers for import substitution. There will be shifting of opportunities, but some industries such as hospitality and airlines will take a longer time to recover.
BRR: Do you have any recommendations for SBP or the government to come up with a better recovery plan, once this is over and how to address the liquidity problem that the industry and banks will face?
BS: I would recommend they both continue to be proactive, as they have been in the last few weeks. If demand continues to remain suppressed, then commodity prices like fuel and oil will also fall. This may provide more room for the central bank for interest rate reduction. As seen in the past, generally, when interest rates have been lower, banks' loan to deposit ratios improve. Generally, at low interest rates, you will see more lending towards mortgage and SMEs.
BRR: The government came up with a construction package and a subsidy of Rs30 billion for supporting builders and consumers in mortgage markets. How optimistic are you that this will be able to boost the mortgage market?
BS: I am optimistic. There is an unmet demand for housing in the country, this will allow banks to build their mortgage portfolios. What banks need to focus on is the low-to-middle income housing market, which will become more affordable now.
BRR: We don't really see any banks maintaining portfolio for mortgage lending to consumers from lower and middle income. So how tough do you see this as a challenge?
BS: Mortgage lending has been a challenge for banks, due to the extended recovery process in auctioning mortgaged properties in case of default. Litigation and recovery are time consuming and costly. For a bank to recover defaulted loans, the cost, whether it is a Rs50 million or a Rs5 million facility, is about the same. Hence, the banks have often been reluctant to engage in extensive mortgage lending. Despite this, JS Bank is the fourth largest mortgage lender in the country and we see considerable growth in this sector if the recovery process becomes quicker and less costly.
As such, the recent Lahore High Court verdict upholding Section 15 of the Financial Institutions (Recovery of Finances) Ordinance 2001, empowering banks to sell mortgaged properties without reference to the courts is very encouraging and will pave the way towards greater bank exposure towards mortgage finance.
BRR: Support is seen for bankable SMEs. What about non-bankable SMEs that are on a margin? Has SBP provided them with credit guarantee scheme or a risk coverage allowing banks to have a broader spectrum of companies to lend?
BS: When subsidy is provided on the financing rates, we try to reduce the burden on existing borrowers. Risk guarantee programs like, SMEs, Renewables or Kamyab Jawan Program; are all aimed to change behavior of lenders so that they can lend to previously neglected segments due to credit concerns. Lenders can be given a portfolio guarantee or a first loss guarantee.
The current scheme for payroll finance practically can only be availed by SMEs that are already banked. JS Bank is the third-largest private sector lender to SMEs in the country, with just over Rs40 billion disbursed, and we are supporting our existing SMEs.
BRR: Banking industry players are the big corporates working in Pakistan, so as JS Bank do you feel the responsibility to give back to the society in these trying times when people are suffering?
BS: It certainly is. We played our part a bit differently as we worked on increasing the grassroot impact. Responding to the unprecedented challenges, JS Bank established a Rs110 million und in association with key partners to help address the impact of the pandemic during April.
Based on a pledge matching initiative wherein JS Bank equally matched all support pledges made by its partners, this fund will focus on addressing some of the immediate and long-term issues related to the pandemic.
The fund has a three-tiered strategy wherein the first phase will focus on provision of rations and necessities worth Rs30 million to food insecure families. The second phase will see distribution of Personal Protective Equipment (PPE) and donations worth Rs50 million to medical and other frontline institutions including non-governmental organizations. The third phase of the program will focus on mitigating the long-term health impact of the virus through medical and technological Research and Development.
BRR: Do you have any message for our readers or your clients?
BS: When there is a major disruption, there is also an opportunity; that is the opportunity for behavioral change and accelerating things already in the pipeline. I would encourage your readers and our clients to look for those trends.