The dominance of unsecured lending is a cause of concern, according to Bank of Botswana, highlighting lurking risks as key sectors of the economy flounder during an economic downturn.
Gross loans and advances grew by 7.6 percent to P62.8 billion in 2019, with growth recorded across the nine commercial banks. While credit growth has been increasing at a decelerating pace, the central bank says the number of loans issued by bank is expected to continue following three bank rate cuts between August 2019 and October 2020, slashed by a cumulative 125 basis points to bring the bank rate to the record low 3.25 percent.
“However, the anticipated slow economic activity in the short term owing to the COVID-19 pandemic may result in slower credit growth,” noted economists from Bank of Botswana in the annual bank supervision report.
Loans and advances to households grew by 13.8 percent to P40 billion in 2019 from P35.1 billion in 2018, accounting for 64 percent of the P62.8 billion outstanding loans as of December 2019. The share of private business loans declined 31 percent, while loans issued to state owned enterprises dropped to 1 percent. The share of financial institutions in total loans and advances was unchanged at 4 percent between 2018 and 2019.
From the P40 billion owed by households, personal loans which are mostly unsecured constituted the largest proportion of household credit at 68 percent, higher than 65 percent in 2018. The share of mortgages declined to 24 percent from 27 percent in the same period. Total household debt as a proportion of GDP increased from 18.4 percent in 2018 to 20.3 percent in 2019. Despite this increase, the commercial bank mortgage lending to GDP ratio decreased slightly from 5.1 percent to 4.9 percent in the same period.
“This relatively low level of mortgage lending and, in general, housing finance, is a cause for concern, especially in the context of the banking sector dominated by unsecured household lending,” the central bank said in its report.
The P21.4 billion loans extended to the private businesses were mostly channelled to agriculture, forestry and fishing; commercial real estate, and tourism and hotels. Despite the increase of their shares in credit, the output growth for the subsectors weakened, contributing to the slowdown in overall GDP expansion, warned officials from the central bank.
“In general, the inherent credit risk for the banking sector was considered high. The risk management systems and controls of banks were satisfactory, but the residual risk remained high” the officials said.
The inherent credit risk is likely to increase over the next 12 months because of the potential shutdown of businesses and loss of employment resulting from the adverse economic impact of the COVID-19 pandemic, according to the central bank. However, the gloomy outlook for credit-quality deterioration will be moderated by low risk of default from government workers who are responsible for the bulk of the household credit and have high job security compared to the private sector which is expected to bleed jobs after the State of the Emergency (SOE) elapses in six months. The SOE which will run for a year prohibits companies from retrenching.