Businesses struggle to repay bank loans

Brian Benza | Wednesday August 6, 2014 16:31

 

Bank of Botswana (BoB) figures show total arrears as a proportion of outstanding bank credit increased from 4.5 percent at the end of  the fourth quarter of 2013 to 5.2 percent as at  end of March 2014.

“This increase is attributable to a large increase in arrears on credit to firms, while arrears on credit to households decreased. The increase in arrears on credit to firms is alarming as it indicates a further deterioration in business conditions,” reads a second quarter economic review report from Econsult.

Driving the deterioration in the asset quality of banks’ loans to businesses is the sluggish growth of the non-mining sector which has been hit hard by the weakening personal incomes coupled with the restraint on government expenditure.

In 2013, the non-mining sector recorded a modest growth rate of 5.2 percent while mining grew by over 10 percent and economic activity in the private sector is expected to remain below the potential level in the medium term.

The trend continued into 2014, as the non-mining sector continued its downward trajectory as its growth fell marginally from 4.7 percent during 2013 to 4.6 percent during the four quarters to March 2014.

Despite the two-percentage point bank rate cut by the central bank last year, which was aimed at encouraging productive lending, credit growth to businesses has been sluggish as households took up the lion’s share of commercial banks’ loans.

BoB figures show that from a growth rate of 3.6 percent in November last year, credit to business has steadily increased in 2014 rising to 6.7 percent in January before further expanding to 8 percent in March.

According to the statistics, the manufacturing sector recorded the highest growth rate with total amount loaned out rising from P2.4 billion in December to P2.9 in April while significant increases were also recorded in the parastatals and mining sector.

While credit growth has risen, this has been followed by a similar trend in arrears with the trade sector the most affected.

Statistics show that between December 2013 and March this year, the trade sector recorded the highest amount of arrears totalling P450 million from P330 million while the construction sector figures also jumped from P21 million to P96 million. The arrears growth rate   in the manufacturing sector was modest settling at P130 million in March from P86 million in December last year.

Traditionally households have dominated the credit growth in the commercial banking sector with businesses recording lower growth rate and arrears as well.

In an earlier interview with Mmegi, chief investment officer at asset management company, Afena Capital, Alphonse Ndzinge said that credit extension to the business sector is highly influenced by business confidence and economic activity.

The latest business expectations survey indicates confidence remains relatively weak with high levels of uncertainty regarding the economic environment.

“Economic activity is also restrained by weak domestic demand, and below trend output particularly for non-mining sectors.

“The impact of actual government spending on economic activity has been depressed with the fiscal consolidation measures of the past 3 to 4 years. Based on the current Budget proposals, planned fiscal development spending growth levels this year is flat.

So in our view the accommodative monetary policy stance is encouraging more spending from consumers and businesses, however the general uncertainty of the global and local economic environment, and pressures on Government spending seem to be neutralising the impact,” he said.