Some short-sighted staff members of Telenor Microfinance Bank Ltd (TMBL) dug a financial hole many years ago, and the bank is gradually crawling out of it at a huge cost.

It may be hard to believe that a microfinance bank claiming to be one of the country’s top three financial institutions in terms of the number of “active” monthly customers is actually a loss-making enterprise for its shareholders.

“As an entity, we’ll be profitable in 2024,” said M. Mudassar Aqil, president and CEO of TMBL, in a recent interview with Dawn.

“We’re on a clear path to hit profitability. We’re expecting to become EBITDA positive by the end of next year,” he said while referring to a measure of gross profitability representing income without accounting for interest, taxes, depreciation and amortisation.

Telenor Microfinance Bank’s CEO says the micro-lender is set to become profitable in 2024

The microfinance bank that owns Easypaisa, a digital payments platform that’s become a proprietary eponym for money transfers. Yet the bank posted a net loss of Rs4.3 billion in the first six months of 2022 versus a net loss of Rs4.9bn in the comparable period a year ago. Its accumulated losses amounted to Rs42.4bn at the end of June versus Rs37.9bn at the beginning of 2022.

So why is the bank that’s credited with so many firsts in microfinance and digital payments appears to be a financial sinkhole?

One of the two main reasons, according to the CEO, is the impairment charge of roughly Rs14bn that the bank took on its lending business after it detected “irregularities and fraud” in 2019.

Disregarding the portion of accumulated losses that predate the 2019 episode, TMBL’s losses amount to roughly Rs27bn. In other words, the irregularities and fraud alone accounted for more than half of the losses accumulated on the bank’s balance sheet during 2019, 2020 and 2021.

“We conducted the biggest and most transparent exercise to clean our books in the history of Pakistan’s banking sector,” he said.

The bank verified close to half a million borrowers to ascertain which ones actually existed, whether their capacity to repay was intact and if there was some irregularity in the way that loan was underwritten. No new-to-the-bank loans were made in the subsequent 16 months.

“We did upfront provisioning for all those loans that seemed improper and cleaned our book. Credit goes to both shareholders (Telenor and Ant groups) that funded the impairment loss and asked us to establish the business once again on a solid footing,” he said.

As for the second reason, Mr Aqil said the Rs13bn portion of the losses of Rs27bn accumulated since 2019 should rather be seen as an investment in building Pakistan’s largest digital platform. “New customer acquisition is quite expensive through digital channels,” he said, noting that a technology-intensive business model demands that the bank should invest upfront in developing the platform and realise its benefits over the next years.

“The loss we’re incurring, which is consistently being funded through equity injections by our shareholders, is only because of the expansion of our digital payments platform,” he said.

Accumulated losses are more of a shareholder concern, he said. From the depositor’s perspective, more relevant indicators are capital adequacy ratio, minimum capital requirement, concentration of the deposit book, extent of leverage and advances-to-deposits ratio — metrics in which TMBL is “one of the best” in the banking industry.

Telenor Group increased its shareholding in the micro-lender to 100 per cent in 2016. Two years later, it sold 45pc shareholding to Alipay (Hong Kong) Holding Ltd of Ant Group for $184.5m. In other words, TMBL was worth $410m in 2018.

Since the acquisition of 45pc shares by Ant Group in 2018, the shareholders have collectively invested $270m in the bank. More recently, the two shareholders injected equity of Rs3.9bn or $22m in February to help the management carry out its business plan.

Despite constant injections of funds over the last four years, majority shareholder Telenor Group has put its full or partial stake in the micro-lender up for grabs. As per publicly available information, MCB Bank Ltd and United Bank Ltd have conducted due diligence of TMBL for a potential purchase of 45pc shareholding.

Saying that there’s been no material development on the matter so far, Mr Aqil refused to state if other parties have also expressed interest in buying the shareholding on sale.

Digital retail bank

TMBL is one of the applicants for the retail digital bank licence, a new initiative by the State Bank of Pakistan (SBP) that’ll allow five players to set up wholly digital banks.

“We’re the only bank in Pakistan that’s transformed itself to the digital-first principle,” he said, noting that its number of branches is already down from 172 in 2019 to 82 now. It’ll close another 26 branches as soon as the SBP grants its approval.

“We’ll be down to 56 branches within this month. We’re actually in a position to close even these 56 branches,” Mr Aqil said, emphasising that its customers hardly need to visit a branch anymore.

TMBL is seeking to convert its existing licence of a microfinance bank into that of a digital retail bank. The objective is to enable the bank to do the “things it can’t do” under the existing licence, such as foreign exchange transactions, consumption loans, credit cards and auto loans among others. Will the intended conversion compromise the traditional customer base of the hitherto microfinance bank once it starts sitting at the big boys’ table of commercial lenders? “We’re laser-focused on our customers. We’ll continue to serve the same segments of micro/small enterprises and retail individuals no matter which table we’re sitting at.”

Published in Dawn, The Business and Finance Weekly, October 17th, 2022