Banks cash in on household debt

Brian Benza
Staff Writer | Friday August 23, 2013 00:00

 

According to the 2012 Banking Supervision Annual Report, commercial banks raked in 61 percent of their P6.5 billion incomes from household borrowings compared to a 20 percent contribution from businesses.The economic slowdown has reduced businesses' appetite for loanable funds while static salaries and eroded disposable incomes have pushed households into further debt. According to the report released by the central bank this week, the share of lending to the household sector was 60.2 percent of total loans and advances, an increase on the 53.4 percent registered in 2011.On the other hand, the share of lending to the private business sector declined from 43 percent in 2011 to 35.9 percent of total loans and advances last year.

'This could be attributed to the slower growth of the economy as well as the repayment of loans by parastatal organisations,' reads the report. In 2012, the banking industry's total income rose by a slower rate of 8.4 percent to P6.5 billion.According to BoB, the slowdown in income growth is explained by the 14.3 percent decline in interest income from loans and advances, and the 54.5 percent decrease in Bank of Botswana certificates (BoBCS). However, despite interest income falling due to squeezed   margins and a static bank rate in the year, interest earned on loans and advances from households was the major source of income for commercial banks, accounting for 61.5 percent.Before reducing the bank rate three times this year in a bid to free up loanable funds to boost economic activity, the central bank had kept the benchmark interest rate stable at 10 percent since December 2010.

While households took up the lion's share of the banks loans, there was no corresponding contribution to the banks' deposits by same individuals leading to the extension of a three-year downward trend in interest expenses.  Interest expenses fell by 9.6 percent during the year coming on the backdrop of relatively low deposit rates in the country. Commercial banks are currently sitting on P47 billion in deposits but the bulk of it, P30 billion, is sourced from businesses while only P9 billion is from households. However in the last 12 months, commercial banks have started to sidestep the usually expensive deposits from businesses, turning to households for cheaper funds in a strategy shift meant to boost diminishing profits. 

While interest income fell in 2012, non-interest income increased from P1.6 billion in 2011 to P1.8 billion in 2012.  'This reflected increased banking charges and related fees brought about by technological developments in the provision of banking services and products, which has compelled banks to recover the cost,' said the BoB.