Additional provisioning will create breathing space for small borrowers: IPDC MD

Loan moratorium should continue for small borrowers as they need more breathing space to recover business losses caused by the pandemic in the past two years. Additional provisioning can be the solution in this regard as this will create a win-win situation for both lenders and borrowers, says Mominul Islam, managing director of IPDC Finance.

During an interview with The Business Standard, marking the 40th anniversary of IPDC Finance, he observed that it would not be much difficult for large borrowers to recoup the damage done by the pandemic since the demand for their products in the market has increased now.

But small customers need more time to recoup their losses as they used business capital to run their family during the Covid-induced shutdown, he added.

"Now if we want to bring them under strict discipline, they will not be able to rebound. Some sectors, along with the SMEs, should be given some breathing space."

Continuing the moratorium facility for these customers will increase risks for the lenders, he said, adding, "In that case, additional provisioning could be made against these loans so that the lenders do not show inflated profit. Last year, banks were asked to set aside 1% provisioning against all moratorium loans.

"We have kept aside 2% of our total outstanding loans for interest suspension and provisioning even amid the pandemic. Just think, we currently have a total loan portfolio to the tune of Tk6,000 crore. We have kept Tk120 crore for interest suspension and provisioning to make sure that we face no problem even if 2% of our customers turn bad."

Provisioning refers to funds set aside by financial institutions to cover bad loans – the ones that do not get fully repaid because the customer defaults, or those that provide less interest income because the borrower negotiated a lower rate.

"Even though our NPL [non-performing loan] ratio is 1.64% – lowest in the industry, we did not want to take any risk. We wanted to be safe. We have taken a prudential approach. We have decided this in consultation with our board," said Mominul Islam.

IPDC, founded in 1981, is the first private sector financial institution in the country. The company was going through a difficult phase in 2005-06. The ratio of its non-performing loans increased to an alarming level – above 30%.

At that critical time Mominul joined the company as its head of operations. "Since then, we have tried to build a robust risk management framework, governance policy and recover bad loans," he said.

"Normally, the board or the shareholders want to take dividends by showing inflated profits. Hence, it was necessary to make a decision to stop this practice. A circular could be issued asking for 2%-5% provisioning against moratorium loans. In that case, there would be no scope for showing unrealistic or inflated profits."

Provisioning is needed both in the banking sector and in the non-bank financial institutions (NBFIs), Mominul said. "Such a measure will have a positive impact on the financial sector. At the same time a breeding space would be created for the affected customers."

IPDC made additional provisioning of Tk388 crore against moratorium loans during the pandemic.

"Now we are confident. Even if 40% of these customers fail to repay loans on time, we will not face any financial loss. Overall, we have posted 25% growth till September this year."

Speaking on the probable money market movement next year, he said, "Prices of commodities are increasing. Our imports also are on the rise, creating a current account deficit. Foreign exchange reserves are shrinking. Fall in forex reserves means the Bangladesh Bank is selling foreign currency. Last year, we saw the central bank buying foreign currency.

"Now the Bangladesh Bank wants to control inflation. The current situation indicates that the market will start tightening in June-July next year. We are preparing in advance."

The financial sector has been in a rather inconvenient situation for the past three years, Mominul said, adding before the Covid pandemic started wreaking havoc in early 2020, the market was going through a liquidity crisis.

"Besides, due to some instability in the NBFI sector at that time, many people were withdrawing deposits. Amid such a situation, we posted the highest deposit growth in 2019. But, the overall growth in business was not good in the 2019-2021 period."

Whether their business will be good next year depends on the impact of the new Covid variant Omicron, he said. If a fresh lockdown is imposed, business recovery will face a setback. "I think the government will be very cautious in this regard."

He, however, expressed satisfaction over the current trend of the overall economy. "Demand has increased a lot. We will be in a better position if it continues. Demand is quite good at the consumer site. Businesses in various sectors such as rod and cement who already had some stocks of raw materials are now making good profits."

"Overall, our expectation is that 2022 will be good for us unless Omicron leaves an adverse impact."

About the investment scenario following the resumption of economic activities, he said benefits of investment are not immediately available.

Explaining this, he said once an investment is made in any industry, it requires at least 12 months to go into production since the arrival of machinery. "This cycle is a problem for the economy."

Mentioning that investors were very much cautious over the past several years, he said they were more focused on capacity utilisation compared to expansion.

"But we have to go for new investments now. And it has started quite well. Imports of capital machineries have grown to a great extent. But it will take some time for the production to begin."

The 45-year-old Mominul started his career with American Express. In 2005, when American Express closed operations in Bangladesh, Mominul joined Standard Chartered through a golden handshake. He joined IPDC in 2006.

After joining IPDC as its head of operations, he worked in various departments of the organisation. In 2008, he became acting managing director. He was appointed the full-fledged managing director of the company in 2012.

Mominul built a good image of IPDC by engaging the organisation with various social works.

He wants to expand its loan portfolio to Tk25,000 crore in the next five years. IPDC needs to collect Tk20,000 crore in deposits to increase its loan portfolio to the targeted level. In this perspective, the non-bank financial institution has launched drives to attract deposits.

Over the last five years, total deposit at IPDC has improved from Tk400 crore to Tk5,000 crore.

The valuation of IPDC was Tk300 crore when Brac joined the company in the year 2015 and now the valuation stands at Tk1,600 crore, said Mominul.