BoB keeps hawk-eye on household debts
| Friday August 29, 2014 16:19
Statistics show that as at May this year, households owed P23.4 billion to commercial banks, rep- resenting 56.3 percent of the total credit.
In a review of the 2014 Monetary Policy Statement released this week, the central bank said the level of household debts is relatively high although default rates are still within satisfactory levels.
“The rate of household credit growth remains relatively high and continues to be monitored for its potential impact on demand financial stability and consumer welfare.
The current trend growth rate of credit is against the background of accommodative monetary policy and a scaling down of liquidity absorption through issuance of Bank of Botswana Certificates (BoBCs), given the need to encourage financing for viable bankable projects,” said the bank.
The rate of credit uptake by households has slowed pace since the beginning of the year following rapid growth experienced in the past three years.
According to a latest financial statistics released by the Bank of Botswana (BoB), credit growth by households has eased from as high as 24 percent at the end of 2013 to under 16 percent in May this year.
The development is a reversal of trends in the banking sector where households have been borrowing at an alarming hasty rate leading to analysts’ call for a policy intervention to check the trend.
In the MPS review, the BoB says that overall, the banking system indicators, including low default ratios for household borrowing, suggest a stable financial environment, with the aggregate ratio of non- performing loans to total loans in- creasing marginally from 3 percent in December 2013 to 3.1 percent in June 2014. “In the context of the projected positive GDP growth, the current assessment is that there is a low risk of widespread loss of employment income that could trigger a significant increase in de- fault rates.
Thus, the current profile of household debt is consistent with the stable financial sector.
The Bank will continue to monitor developments to ensure that this financial stability is not undermined by potentially excessive consumer debt,” said the report.
In a report released in July, the International Monetary Fund (IMF) recommended that monetary authorities should consider using macro-prudential measures to contain the growth of household borrowing, including a tighter debt to income ratio, and as- signing higher risk weights on unsecured lending to households.
“Data gaps in capturing household borrowing outside the banking system need to be addressed to make macro- prudential tools more effective.
“The continued rapid increase in the household borrowing is a potential vulnerability to the financial sector. Discussions with the banks suggest that some households are already beginning to experience difficulties in re- paying their debt, although this is not widespread,” said the IMF. While the deceleration has been welcome, market observers also say that the situation would likely be amplified in the event of a return to a period of high interest rates since a vast majority of loans to households are contracted at floating rates.
Supported by weakening inflation, the BoB has halved the benchmark bank rate from as high as 15.5 percent in 2009 to the current 7.5 percent in an effort to encourage productive lending.