Batswana indebted to banks

MBONGENI MGUNI
Staff Writer | Wednesday September 1, 2010 00:00

Commercial banks' provisions for bad and doubtful debts - a reflection of the funds banks could lose due to arrears - shot up by 79 percent to P790 million in 2009, further mirroring the depressed economic environment of last year.

The Bank of Botswana (BoB) Banking Supervisory Report 2009 released last Friday indicates high incidence of arrears among household and business borrowers, with the central bank committing itself to 'closely monitoring the banking industry,' management of credit.

The Report reveals that households accounted for 77 percent of the P1.5 billion past due loans (arrears) for 2009, an increase from 69.1 percent in 2008.

'This is a manifestation of the difficult economic conditions occasioned by the lagged effects of the global financial crises and consequent economic recession which started to be felt by the Botswana financial sector in the last quarter of 2008. 'The Bank continues to closely monitor the banking industry to ensure that banks take appropriate measures to manage credit risk, including proactive monitoring of loan performance and timely recognition of problem credits,' the BoB Supervisory Report reads.

Central Bank researchers warned that commercial banks could be forced to write off part of the P790 million in provision for bad and doubtful debts and P1.5 billion in arrears due to continuing adverse economic conditions in 2010.

'Going forward, there is a possibility of increased write-offs given the increase in adverse loan classifications as a result of a cash flow squeeze experienced by households and private sector enterprises associated with the slow recovery of the economy and the reduction in spending by government.'

Households, crippled by the absence of a public service salary increase in 2009 and the recession's other effects on disposable incomes, surprisingly drove commercial bank lending accounting for 58 percent of the P20 billion lent out in 2009. Loans to households grew by 16 percent, from P9.8 billion in 2008.

Although by the book, economists expect credit uptake to lessen in line with lower disposable incomes and harsh labour industry conditions, the Supervisory Report indicates higher credit growth among households.

BoB researchers explained the conundrum. 'Bank lending to households increased, resulting in households accounting for more than half of banks' total loan portfolio. Put against the background of shrinking real households incomes, this development may well be considered perverse.

'However, households are known to smoothen their expenditure patterns over time, and in this case, they were able to borrow in spite of the erosion of their capacity to service debt, which could mean the erosion was not severe,' the Report reads. In spite of households' resilience, the BoB Report warns that households could come under increasing pressure should the pace of the current economic recovery be slower than expected.

'This could impact negatively on households' capacity to service loans, thus resulting in a deterioration of asset quality of banks,' the Report reads.Loans to the private sector grew marginally by 1.3 percent last year to P7.76 percent, with recession-hit sectors such as mining and construction reducing their credit uptake. In general, the proportion of loans to the private sector has been declining over the years, compared to households.The BoB commended the country's nine commercial banks for remaining resilient during the recession, noting that most reported high levels of liquidity and capital adequacy ratios.

'Regulatory compliance remained high, consistent with the responsiveness of the sector to supervisory and policy signals. The Bank will continue to monitor progress on the global financial reform agenda and review banking regulatory and supervisory policies and practices as may be justified by prevailing financial and economic developments at both the international and domestic level,' said BoB Governor, Linah Mohohlo.