Banks caught in liquidity, weak economy spiral
Brian Benza | Friday August 28, 2015 15:31
According to Bank of Botswana (BoB) figures released this week, the rate of loans uptake by both business and households dropped 45 percent in the first half of the year, from 13.5 percent in December 2014 to 7.4 percent in June 2015. The slower credit growth comes on the backdrop of a two pronged intervention by the BoB in the period, raising suggestions that the simple matrix of supply and demand of credit in the banking system has been caught up in other industry-bred complexities.
In a bid to bolster economic growth through reduced cost of lending by commercial banks, the central bank cut the benchmark rate by a percentage point in the first half of the year.
In the period, the apex bank also released an extra P2.3 billion to ameliorate tight liquidity in the banking system through cutting of the primary reserve requirement.
But despite these inventions, the rate of loans uptake has slowed down with businesses affected more than households.
Analysts assert that the slowing credit growth in an environment of lower interest rates is a reflection of the tight environment that businesses and households are operating under.
On the other hand, the status quo is also seen as an indication of the stricter lending conditions applied by commercial banks due to tight liquidity and the spiraling costs of sourcing new deposits.
In the period, credit uptake by businesses took the hardest knock with year-on-year growth in lending to the business sector decreasing from 17.2 percent in December 2014 to 4.2 percent in June 2015.
Research manager at FNB Botswana, Moatlhodi Sebabole believes the sharp decline in business sector credit growth is an indication of deteriorating business conditions due to subdued demand while some businesses are unable to satisfy banks’ lending requirements.
“Business faces challenges such as weak demand prospects, rising costs of inputs due to shortages of water and electricity and others, as well as inability to create sustainable employment – all of which makes access to finance more difficult,” he argues.
Businesses that traditionally relied on government expenditure for growth are feeling the brunt of purse tightening by fiscal authorities, with the budget now expected to post a deficit in the current financial year.
Economic activity is also expected to dampen this year with finance ministry officials now forecasting a 2.67 percent growth rate in 2015 from the original 4.9 percent.
Although not at the same rate as businesses, credit growth for household, also fell from 10.7 percent to 9.9 percent in the same period largely due to stagnant personal incomes as well as tighter lending by the commercial banks.
“Households have high level of indebtedness and some eroded purchasing power which then makes credit qualification difficult. The lenders react to the environment by tighter requirements which lead to either higher lending rates to reflect the risk of the borrower or less credit growth as most borrowers are unable to meet the tighter credit criterion,” Sebabole says.
Due to the high costs of sourcing new deposits, commercial banks have tightened their credit extension requirements while new loans are being priced at much higher rate to reflect the high risk despite the low interest rate regime.
With the reduction of the prime-lending rate to 7.5 percent early this month, following a bank rate cut to 6 percent, some holders of loans on a variable interest rates have enjoyed a reduction on their lending rates.
However, for households that hold personal loans this benefit might not have trickled down to them, as most commercial banks apply a fixed rate on an existing loan.
“For all the loans which attract variable interest (which is normally linked to the prime rate), banks reduce the rate as and when the Bank of Botswana cuts the bank rate. This is a matter of compliance that all the commercial banks have to adhere to, and thus translate the benefit of the reduction to the borrowers at the extent of the interest rate cut.
“However, given the rising costs of funds – some new written loans are generally priced relatively higher despite the low interest rate environment and this is a reflection of the higher cost of funding and tighter credit requirements in the current environment where businesses and households face economic pressures,” adds Sebabole.
The Bank of Botswana says the current profile of household debt is consistent with maintenance of financial stability as reflected in the annual growth in mortgage loans to households, which declined from 18.4 percent in December 2014, to 6.9 percent in June 2015, while unsecured lending increased from 7.4 percent to 11.2 percent in the same period.
Despite the increase in unsecured lending, the central bank has said that there has not been a rise in default ratios, with aggregate ratio of non-performing loans to total loans printing 2.9 percent in June 2015, unchanged from December 2014.