Banks credit growth dips to decade low
Brian Benza | Friday February 12, 2016 11:00
According to data availed by the Bank of Botswana (BoB), annual credit growth fell by nearly half from 14 percent in October 2014 to eight percent in October 2015, with decline almost entirely concentrated on corporate borrowing.
Credit growth rate was last below eight percent ten years ago when it reached 7.2 percent in December 2005.
“Bank credit growth has fallen to the lowest level in a decade and arrears remain problematic. Banks have become very cautious in making new loans due to concerns about the volatility of the deposit base and the ability of customers to repay,” said analysts at Econsult.
The slower credit growth comes on the backdrop of a two-pronged intervention by the BoB in 2015, adding weight to 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 2015, 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.
BoB data also shows that the uptake of loans by businesses has considerably slowed down when compared to households.
As at November 2015, businesses credit growth stood at 1.1 percent while households stood at 13.9 percent.
The challenges of slower credit growth have also resulted in lower profits for banks.
In the first nine months of 2015, the post-tax rate of profit for the banking sector as a whole was only 12.5 percent (annualised), sharply down from 18.6 percent in 2014 and half of the 25.7 percent earned in 2013.
“Almost all of the profit was made by the three largest banks, meaning that some of the medium-sized and small banks were probably making losses.
“But there is a danger that such a sharp fall in profitability could lead to instability in the banking system, which would have widespread costs.
And as a general indicator of deteriorating business conditions, it is of major concern. Furthermore, there is a fiscal impact through reduced tax revenue, given that the banks are amongst the largest taxpayers in the economy, after Debswana,” said the analysts.
First National Bank of Botswana research manager, Moatlhodi Sebabole believes the slower growth in the banking sector reflects both declining fixed investments by businesses as well as eroded purchasing power of households, which makes credit qualification more stringent.
According to Sebabole, there is a possibility of a rebound in the banking sector this year in line with the recovery of the general economy.
“The growth of the sector is positively correlated to economic growth and as long as overall economy health remains fragile, the sector will continue to undergo some turbulence.
This will therefore increase the need for banks to get more innovative in product offering, do more structuring and off-balance sheet activities so as to diversify their income streams on the non-interest income,” he said.