Asset management outfit, Bifm, has joined the chorus of those worried that households are becoming increasingly indebted to the banks, with borrowing increasing faster than deposits, a trend that could lead to families breaking up.
In its quarterly review for the 2nd quarter of 2011, the leading asset manager in the country said though there is relief in lower interest rates, the level of debt stress is already reflected in arrears and bad debts on loans from banks.
“Households are becoming increasingly indebted to the banks, with borrowing increasing faster than deposits,” said the review by Dr. Keith Jefferis, who is Chairman of Bifm Investment Committee.
“Combined with stagnant or declining real incomes, at least for some households, this could lead to major household debt problems,” Jefferis added.
Households account to 57 percent of total bank lending. However, it is not clear on the percentage of what is borrowed for consumption as consumers could borrow to finance small businesses.
Bank of Botswana has previously revealed that 80 percent of loans that are in arrears are in households.
“Some relief is being provided by lower interest rates, but the level of debt stress is already reflected in arrears and bad debts on loans from banks,” he said.
Despite rising inflation, the Bank of Botswana has maintained interest rates at the same historically low levels throughout the quarter. Current Bank Rate is 9.5 percent.
Bifm argued that it may take time for government to consider interventions to manage the level of indebtedness, curb irresponsible lending and require reporting of all loans to credit bureaus so that lenders can reach a realistic assessment of the capacity of potential borrowers to take on more debt.
Botswana is lagging behind South Africa, which has a credit bureau to check that individuals do not borrow beyond their means and there is also no coordinating agency that can keep tabs that customers are not overborrowed with other lenders.
It has been found out that households also borrow from other sources besides banks, including employers, microlenders, cash lenders, furniture stores and pawn shops.
“While NBFIRA is in the process of introducing regulations to govern the activities of microlenders, the reforms need to go well beyond this and almost certainly require dedicated credit legislation,” advised Jefferis.
Bifm also highlighted that 2011 has been a difficult year for the banking sector, with weak demand for new credit and the persistence of high arrears rates on lending to households.
Total credit growth over the year to April was only 9 percent, barely more than inflation and much less than the rate of nominal GDP growth. With the continuation of a low interest rate environment, and, in particular, low rates of interest on BoBCs, banks’ key sources of income and profits are under pressure.
“This squeeze will be intensified by the raising of primary reserve requirements by the Bank of Botswana from 6.5 percent to 10 percent of pula deposits from July 1.”