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5 reasons why smaller banks are solution to common man's financial need : By CA Paras raj Kandel

When we think of Banks in Nepal, the first name that comes to our mind is ‘Standard Chartered Bank’ or as they say ‘SCB’. Next comes other big Banks with big portfolio and big profits; those which manage to find place in newspaper every often, what with new products and services they bring in regularly. At the same time, when a common man thinks of his banking needs, it’s rarely that the Banks come in the same order; rather, the same Banks may be the least remembered ones. What’s happening? Aren’t the biggest Banks with range of services and with the biggest brands supposed to be luring common customers? Not necessarily. It all depends on the Banks’ strategy and their positioning (image of the Company in the eyes of customers).

At least the market positioning of these bigger Banks is something elusive to the common Nepali customers. This is the Gap the smaller development Banks, Finance Companies and other Financial Institutions have been exploiting. It is generally believed that, these smaller BFIs are only getting the pie of the market, leftover by the bigger Banks. It’s time that this notion is challenged, by these smaller BFIs themselves. Awareness of the available Gap and the market need and a strategy to go with it will benefit both these smaller BFIs and the customers largely deprived of the necessary financial needs.

Below are the five reasons why and how smaller BFIs can and should be solution to common man’s financial needs:

1. Making collaboration a model of innovation:

Innovation is not something that needs to be done at the top management level by some experts. Such an innovation may not even be effective if feedback on the new products / services are not taken from the employees selling the products or the customers. In fact, if a system of employee and customer feedback is put in place, Companies can come up with very innovative products and services. Since large Banks are highly structured in their set up, collaborative model of innovation may not be possible while at smaller BFIs with relatively lesser hierarchy and formal structure, the innovative ideas can reach from the junior-most employee or an unknown customer to the top management almost in no time, thereby triggering quick innovation and thereby addressing the needs of the customers and the market.

2. Simpler risk management and Compliance practices

Knowingly or unknowingly, but not desirably, risk management and compliance have come to be considered as end in themselves whereas they are means of developing sustainable business practices. This notion on risk management and compliance has also been formed because of large organizations having to control no. of units with vast no. of products that are distributed over large geographies having unique political, economic and behavioral risk structures thereby requiring complex and strict risk management and compliance culture.

Smaller BFIs have much lower exposure to risks in terms of both volume and variety. This is where these BFIs can and need to score over their bigger counterparts. What these BFIs need to target is a practical approach to risk management and at the minimum, the regulatory compliance. Also worthy of taking note here is that there are a lot of business drivers (provisions which can be used to increase business) within the compliance requirements of regulators (mainly Nepal Rastra Bank).

3. Faster processing of products and services:

Financing of business as well as personal needs through informal borrowing at exorbitant rates is a common phenomenon in all third world countries; it is of course very pronounced in Nepal. One of the main reasons for the attraction of informal borrowing is the long time taken by BFIs in processing of services.

While bigger Banks with complex structures and approving channels will continue to take time, smaller BFIs cannot continue to afford that; the processing time should be shortened; especially for smaller loans generally required by mass customers. Simpler risk management and compliance structure and decentralization of decision making (point no. 4) go a long way in drastically reducing the processing time. Further, prompt conditional approvals in the form of letter of intent may give customers a big comfort in dealing with these BFIs.

4. Decentralization of decision making:

Related with point no. 3 is the need to decentralize decision making. With the advent of technology and again, the complex risk management and compliance structures, the bigger Banks have been following centralized model of decision making; leaving the branches and units to mainly perform the administrative functions within set guidelines. Smaller BFIs with the need to deliver easy and faster services cannot afford to create a highly centralized approving structure in place. Decentralization of decision making with competent and most preferably, local employees (point no.5) greatly enhances customer service and meets the needs of the local customers.

5. Hiring of local employees:

In highly corporatized Banking world, the structure of human resources is largely determined at the corporate level by top management. Transfers of employees are made at frequent intervals, leaving the business dependent on strong knowledge management system and guideline based decisions. The point in case of smaller BFIs however, is different. With all the points above indicating towards easier, faster and accessible banking services, smaller BFIs need to have someone at the business units who the customers know and vice-versa. This can be achieved by hiring local employees or employees with substantial root in the place of customers. This will make these BFIs more approachable, marketable and sellable.

Source: Paras Raj Kandel's Blog