Wednesday, October 21, 2020

Bank rate cut good for borrowers but on wrong side of savers

Stanbic Bank Botswana Chief Executive Officer Leina Gabaraane says rate cuts by their nature adversely impact on banks’ income by eroding interest earned by the institutions.

“We must always remember that reduced bank revenue only impacts on the banks, which are just one of the many components of the ecosystem,” says Gabaraane.

He says that although bank revenue suffers, in the long run the financial institutions will adjust and actually benefit through increased lending, and a better performing economy. The Stanbic Bank CEO is of the view that commercial banks play a critical role in the economy. He said among the many roles that banks play is to facilitate the transmission of the Central Bank’s monetary policy.

“I confirm that Stanbic Bank also made the adjustments. Interest rates cuts are just another one of the many tools that can be deployed by a Central Bank to help stimulate economic growth,” he stated.

Gabaraane said lower interest rates mean lower cost of debt, which in turn is expected to translate into increased borrowing, and then increased spending, which stimulates economic activity.

Barclays Bank Botswana Managing Director Reinette van der Merwe said the interest rate adjustment instruction is with immediate effect adding that as such her bank adjusted the rates on the day of announcement which was on August 12. 

“Naturally, whenever there is an interest rate reduction, it results in a margin compression for all banks. However, there is also an upside for banks as an interest rate reduction generally results in more disposable income to consumers, to stimulate the economy,” she said.

She is of the view that the interest rate cut is a benefit for all customers with loans with the banks and she added that this benefit would be realised more on products with higher loan amounts, such as mortgages.

Econsult Managing Director Dr Keith Jefferis is of the view that the commercial banks have to adjust their prime lending rates accordingly. He stated that these are fixed at bank rate plus 1.5 percent, adding that hence all lending rates that are pegged to prime will also fall by 0.5 percent. Jefferis said it was also expected that other interest rates, such as deposit rates, will be adjusted downwards.

“It is good news for borrowers. However, it is bad news for savers, who already struggle to get a decent rate of interest on their savings. It will therefore discourage savings,” he said.

He believes that another concern is that it will encourage further borrowing by households, who are already highly indebted by some accounts.  He added that if households get deeper into debt, they will be very exposed when interest rates eventually start to rise, and this could be very painful and lead to arrears and defaults.  He warned that households should be cautious about borrowing too much at low interest rates. 

“The most badly affected group will be people who are about to retire, as their pension savings will be worth even less, and what they receive will be reduced, as these are closely tied to interest rates,” said Jefferis.

He is of the view that banks profitability is likely to fall further, after declining for the last decade, adding that some banks may be pushed into loss-making situations. 

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