For many banks, lending to small businesses is always seen as a risky affair. But Prime Bank, now with three decades of betting on small businesses, explains how it finds the sweet spot in an area where many large banks have struggled.
Prime Bank CEO Rajeev Pant spoke to Business Daily about the power of consistency, specialisation, staying close to customers and avoiding risky bets, and how this has offered a formula to keep loan default rates at below three percent against the banking sector’s over 17 percent.
Prime Bank has been in Kenya’s banking sector since 1992, yet it is largely conservative. Why this approach?
The Prime Bank story, started 32 years back but there are some things which have been very consistent over those three plus decades. Prime Bank remains an extremely conservative bank: extremely careful on its credit and extremely careful on its liquidity.
Some people tell us we are too liquid, but that's fine. it is by choice. While we have been conservative, we have also been on a journey of making sure we can deliver better to our customers.
We are not into mass retail; we are also not into high net worth. We are somewhere in between. That is where we find our sweet spot. We understand our customers and our customers understand us. The secret is the service and the agility.
You said you are neither in mass retail nor the affluent. What do you find in between?
The sweet spot has been SMEs and MSMEs. That is really what we are focused on.
Every bank talks about SMEs, because that is the flavour of the day. But the point is, Prime has been doing it consistently for the last 32 years before SMEs and MSMEs became the flavour of the day.
That is really what we understand well and I think, this is which has got us to becoming the 10th largest bank in Kenya. That speaks to the power of specialisation. One word you will often hear a lot from us is ‘consistency.’
SMEs are a pain point for many banks yet you consider this your sweet spot.
We have bucked the trend and the main reason comes back to the power of understanding your customer first. We do what we understand best, which is the small businesses sector. We service it well.
We are agile within that and that's what we stick to. And there are certain businesses we have less exposure. For instance, we are not in floriculture or agriculture in general. What we understand best is what we stick to. It is ok to say ‘no’ sometimes.
Manufacturing and trade are businesses we understand so well just like you will have other banks that understand mortgages very well. Some understand tiny sectors very well and they focus on that.
Others understand very large profits very well and they focus on that. The trick is to find out what you understand and then focus on that.
Does it mean even as you focus on SMEs you go as far as defining which sectors within the SMEs space to lend to?
One step before that, we pause and ask ourselves: ‘Do we understand the customer?’ If we understand the customer and his or her business right, then we will be able to give a solution which works for both of us. It will ensure that we are there through thick and thin.
We only get into a relationship [with the customer] if we understand what they are doing. If you look at any bank, the successful ones are those who stay close to their customers. That is no major secret there. But the hard part lies in execution.
How does Prime Bank balance conservatism with the growth?
It is a very fine balance there. The right way we look at it is by asking: What is that level of NPLs? Is it reasonable? And what is our bottom line looking like? Have we been growing consistently?
Both the profit and dividend payout have shown significant growth over the last five to seven years. We like consistency. We don't have a year where we go 100 percent up and then crash 50 percent.
It is true that our conservatism could be locking out some business but just because a business is conservative doesn't mean it is not ambitious. The ambition is there but it is within those parameters [of conservativeness].
In your journey with customers, how are you able to achieve such a low loan default rate of 35 percent loan book exposure in trade and 28 percent in manufacturing? These sectors have been problematic for many banks.
The ambition is to first understand the customer—understand his or her business, and then see what we can do for them. There are some customers whose business we will not be able to support and we have to be frank with them rather than chase after volumes.
As a random example, if you were a diamond trader, chances are we will not be able to do much for you. If you are looking to raise crops in a certain area, we may not may not give you the solution you are looking for.
You have both a debt management committee and a credit committee. How do these governance structures help keep NPLs this low?
The credit committee is what I would call the first portion, where we actually assess credit and decide whether we want to give a facility to a customer. The Debt Management Committee ensures that we continue to follow all our rules and quickly highlights any issues which may be apparent after we have disbursed the loan.
The general view about SMEs and MSMEs is that they are ambitious. They want to grow and this involves taking risks. This conflicts with Prime’s conservativeness. How then does Prime Bank find a perfect match in small businesses?
I don't think they conflict. Being conservative is different from being reckless. Anything you do has a risk in it. It is a question of you looking at that risk and arriving at that balance.
Banking is not rocket science. There is a fair amount of common sense involved in it. Common sense, coupled with credit analysis and understanding of the market gives us a better understanding of the industry and the customer. When you put all that together, then you get to where you want to go.
How do you ensure that you avoid chasing numbers and stick to chasing quality?
Our philosophy has always been we want stable growth. Once you have a philosophy that you want to chase the right growth then you are not likely to stress about volumes.
This philosophy was established by our chairman [Rasik Kantaria] and this principle continues to this date; it is ingrained in the organisation. We want to do the right thing. We want to get the right growth.
