Crisis forces banks back to basics

The economic crisis is forcing retail bankers to re-focus on the basics of banking, including the long neglected customer service.

Banking professionals at the fourth Middle East Retail and Banking Forum unanimously agreed that the crisis has not spared the region and this has created even more need to address customer service

Rajeev Kakar, EVP and Regional CEO, Fullerton Financial Holdings, said although there are several banks in the UAE only a few give customers the top priority.

"There are several banks here but very few are focusing on customers," Kakar, who is also the Executive Director and CEO of Dunia Finance, told Emirates Business on the sidelines of the forum.

"When we researched the market, we found out that there were so many customers who were not being served correctly. There is no focus on customers, especially in the UAE. The banks are focused on products."

He said the reality of the Middle East retail banking business is that customers are largely ignored.

His comments echo the latest Benchmarking Service Quality Survey for UAE Retail Banking, which said the continued lack of improvement in customer service of some banks has become "alarming".

The study, done by Ethos Consultancy an independent firm, shows that more than 75 per cent of prospective customers get in touch with a branch first and then move on to other delivery channels.

It also highlighted that customer satisfaction in the UAE retail-banking sector, especially in the call centre area, has consistently declined in the past few years.

Gary Mond, Head of Retail Banking at Mashreq in Qatar, added: "In my experience, sales increase by merely focusing and listening to customers… You can flood people with offers but what really matters is the quality of offering and how the banks treat customers as a person."

One good thing about the crisis is that the banking industry has been forced to share best practices on how to manage the crisis.

Sundar Parthasarathy, SVP and Head of Retail Assets, ADCB, said: "People have recognised that there is an issue. How do we manage it collectively? That's what we are doing," he told this newspaper. "Customer service is very important because what we have seen in the case of real estate, as we talk to developers, is that you have to be patient. You have to understand the customer's needs otherwise he would go to other channels."

"I heard this topic of cross-sell but what happened in other markets is that banks only looked at the figure without actually realising whether that customer needs that product. And then what happens? In this critical time, that customer defaults and he'll say, 'well I didn't go to the bank proactively. You guys went after me so why are you guys blaming me now?'"

Kakar said the crisis was primarily caused by the decline in values.

He said there was been a belief that growth is only a quantitative phenomenon, which instead should have been based on an old-fashioned approach built on liquidity, sustainability and solid values.

This resulted in a new world order whereas cheap credit, high liquidity and fiscal surpluses characterised in 2008 to 2008; this year and next year would be characterised by expensive credit, shortage of liquidity and lower fiscal surplus or higher deficits.

"The traditional rules have been broken," he said. "This includes knowing your customer, prudence in lending, closely monitoring and tracking customer behaviour and respecting money and risk."

Currently, the region's retail banks are under "serious stress" due to the crisis of confidence brought by the credit crunch, Sanjoy Sen, Country Business Manager, Global Consumer Group at Citibank.

He said the growing bad debt is beginning to creep into many businesses such as cars, personal loans and mortgage creating unprecedented stress in banks portfolio. "There has been the destruction of financial institutions in unprecedented scale," he said.

The region, he said, has not been insulated in the crisis as evidenced by the drastic is drop in oil and commodities prices, steep decline in real estate, tourism, retail and foreign investments banks. This decreases demand and confidence levels and increases job losses. Retail banks are now facing serious challenges, one of which is the most discussed liquidity issue. Because of fierce competition for deposits, funding has become difficult. De-leveraging, a process when households opt to pay off debts and minimise spending, has led to the shrinkage of good assets. "Banks used to have high concentration on some specific sectors such as tourism and real estate and there has been an unprecedented correction in real estate prices and we know that there are many banks here that are associated with the real estate industry. The industry pool is being reduced significantly," Sen said.

The UAE, along with the rest of the GCC, was fortunate enough to have limited exposure to the sub-prime mortgage problem, which is the root of the current global financial turbulence across the board.

According to the central bank, the UAE's banks' total exposure to sub-prime mortgages is limited to a negligible ratio of 1.2 per 1000 exposure.

However, the banking system could not escape the aftermath of a dried up interbank market, a collapse in capital markets, as well as the banks' own funding constraints on the deposits side. High inflation across the board within the GCC resulted in negative real interest rates.

This coupled with speculative money leaving the system from the UAE pressured deposits to grow by 22 per cent during 9M08, not matching the 37 per cent advance in loans and loudly announcing the existence of a severe liquidity problem within the UAE banking system and an urgent need for government interference.

The momentum slowed slightly during 4Q08, as deposits grew 5.8 per cent during the quarter, outpacing the 3.4 per cent increase in loans trimming down L/D ratio to a 110.4 per cent by year end.

On the mortgage side, lenders also hit a funding wall, urging them to drop their loan/value ratio to lower than 60 per cent from the previous 75 per cent.

The problem also sparked talks between the UAE's largest mortgage lenders (Tamweel and Amlak) to merge and apply on a combined basis for a banking licence to secure funding for their future operations.

With no cheap alternative, banks started chasing after deposits by significantly raising their rates to unprecedented levels, such as 5.55 per cent by ADCB for three months and 5.05 per cent by HSBC on one month deposits given a minimum balance of Dh25,000, in order to attract customers.

Defaults at the same time are going up and even good customers are starting to default, Sen said. He said although Citibank is in a much more stressed situation compared to last year in terms of bad debt, the bank is nevertheless in a much better position compared to other peers because of their "very tight" under writing and credit processes.

He said many people have over-leveraged and one of the smart things to do is to have smart pro-active collections and predict which kind of people will default.

Sen said have a strong collection team and having a tie up with collection agencies in other countries is essential.

"There should be a focus on collection," he said. "In our case we put our best people in collection. Collection is not an after thought but a front line strategy."

The crisis, Sen added, has created new customer needs, which could in turn create new opportunities. The job instability, drop income and unprecedented loss of confidence for instance have made people more cautious in spending.

"There are new customer needs that are coming out of the financial crisis. We notice that card transactions are moving to the basics so perhaps there is opportunity in partnership with the groceries," Sen said.

"Investment plans, people now shift from very high equity driven to safer saving plans. In loans segment, good customers now want smaller and affordable loans, affordable and they want them [loans] restructured so they can pay them in a longer period of time."

"These new needs create new opportunities," Sen added.

"There is decrease in demand and increase in competition. Transaction needs are changing because people are going back to the basics like food and petrol so there are opportunities to move into this segment of basic products. In investments customers want to diversify their businesses. About 70 per cent of Mena wealth are kept offshore so there is opportunity in this wherein banks can help customers manage their money."

Sen presented other "mantras" that will ease the crisis. This includes redefining the market, segmenting customers differently, redesigning channels to reach customers, renewing focus to cross-sell to existing customers, reconfiguring product offering, developing risk-based pricing, re-engineering process to drive efficiency and managing balance sheet and product profitability.

ICICI, India's second-largest private sector bank, is also looking at increasing its branches in India from 1,262 in 2008 to 1,400 this year and further increase it to 2,000 by next year, all this by not increasing its capital and operational expenditures.

The goal is ambitious considering each additional branch involves about $150,000 (Dh550,000) a year of operational and capital expenditures and usually takes 18 months to break-even. "This I think is feasible," V Vaidyanathan, ICICI bank Executive Director and Board Member, said. "There are two ways to do that we are trying to find ways to reduce the expenses from our existing operations and to re-orient the resources from the existing areas of operations to new growth areas.