The Bank of Botswana (BoB) has moved to ease the prevailing tight liquidity conditions in the banking industry by releasing P2.3 billion into the market.
In a move aimed at augmenting funds available for lending for commercial banks, BoB governor Linah Mohohlo yesterday halved the Primary Reserve Ratio (PRR) for commercial banks from 10 to 5 percent, effective April, 2015 .
Primary reserves are the commercial banks’ deposits held in a special non-interest earning account at the Central Bank.
The maintenance of these deposits at the Bank contributes to the absorption of excess liquidity in the banking system.
The PRR reduction marks a ‘new normal’ in the banking industry where the central bank’s role has been reversed from liquidity absorption to provision as excess liquidity dries up.
Addressing the media in Gaborone, Mohohlo said that while the sector remains sound and profitable, tightening of liquidity has been evident.
“Bank’s loanable funds are becoming exhausted due to a period of rapid credit growth, compared to a slower increase in deposits.
“The reduction of the primary reserve ratio will release a total of P2.3 billion,” she said.
The PRR was increased to 10 percent from 6.5 percent in July 2011 in a bid to mop up ecess liquidity.
In the past five years, excess liquidity in the banking system as represented by outstanding Banking of Botswana Certificates (BOBCs) has declined from P17.7 billion at the end of 2010 to P4.6 billion in February 2015.
Contributing to the reduction of excess liquidity in the banking sector was a mismatch in the growth rate of deposits against credit.
Since December 2010, deposits have grown by a much slower rate of 37 percent to P53 billion while credit has grown by 104 percent to P45.2 billion.
“This resulted in a sharp increase in the intermediation ratio, which is simply a ratio of bank loans to deposits from 53.1 percent at the end of 2010 to 87.6 percent in a four year period to the end of 2014,” said Mohohlo.
Announcing their results for the full year results for the period ended December 2014; Botswana’s largest bank by assets, First National Bank of Botswana (FNBB) said liquidity conditions in the market remained tight as the loan-to-deposit ratio (excluding foreign currency) was reported at 97 percent in October 2014.
“This presents a challenge for financial institutions to participate in growth opportunities in the country,” said FNBB.
Barclays Bank of Botswana, last Friday said their Loan to Deposit Ratio (LDR) had increased to 90 percent and would, if necessary, look to tap into their capital base and bond market to shore up liquidity.
The BoB recommends for banks to have a LDR of between 60 to 80 percent.
The liquidity challenges faced by banks is part of sweeping changes in the sector that was previously characterised by excess liquidity, super normal profits and low deposits rates.
While welcoming the reduction in the PRR, banking industry officials say the amount released would provide temporary relief for the sector, but not address the structural problems which caused the liquidity problems in the first place.
“The P2.3 billion will in some way result in certain banks loosening their credit extension or even improving interbank trading.
“But, this will not address the structural shift where deposit growth rate lags behind that of credit. In this period of low interest rates and increasing appetite by the business sector for credit, P2.3 billion might just provide relief for just a couple of months.” said an executive with a local commercial bank, who declined to be named.
A crude back of the envelope calculation shows that the P2.3 billion can be wiped out in less than 10 months as, despite the prevailing tight liquidity conditions, total credit extension in the month of December alone increased by P236 million to P45.1 billion.
While the governor urged banks to direct more efforts towards deposit mobilisation and financial inclusion, industry officials say that other measures may be necessary to encourage more deposit inflows into the banking system as a whole, rather than just competition between banks to reshuffle existing deposits.
“This could include encouraging deposits from non-residents, or stimulating the transfer of resident deposits from foreign currency accounts (FCAs) – which account for around 15% of total deposits - to Pula accounts,” analysts reckon.