Sunday, December 10, 2023

Covid-19: Banks in tight spot

Botswana’s commercial banks will be walking a tight rope this year, balancing the growing appetite for credit against risks posed by the uncertainty caused by the covid-19 outbreak that has rattled major industries. 

Annual growth in commercial bank credit increased to 10.2 percent in February, much higher than the 6.6 percent annual credit growth recorded in 2019’s corresponding period, reveals data from Bank of Botswana’s Monetary Policy Report, published every four months. 

The April report attributes the strong credit growth to availability of liquidity, as well as increased demand for household loans, particularly unsecured lending, mortgage and vehicle loans, influenced by the increase in public services salaries and the decline in lending rates following the 25 basis points reduction in the Bank Rate in 2019, from 5 percent to 4.75 percent.

Household loans increased significantly by 15.2 percent in the twelve months to February 2020, from 6.3 percent in the corresponding period last year. On the other hand, growth in lending to the business sector declined from 7.1 percent in the twelve months to February 2019 to 2.3 percent in the corresponding period in 2020. The slowed growth was partly due to repayment of overdraft facilities by some companies in the manufacturing sector, including those in the diamond cutting and polishing industry, construction, finance as well as trade sectors. 

The decline in the amount of credit held by businesses echoed sentiments gauged from local firms earlier this year from a survey conducted by the central bank. According to the Business Expectation Survey findings, domestic businesses expected lending rates and the volume of borrowing from the domestic market to increase in the twelve-month period to March 2021. However, the businesses perceived access to credit to be tight in the first quarter of 2020, mainly because they consider the domestic interest rates to be high.

“About 73 percent of the surveyed firms cited accessibility and affordability of their required loan products as the basis for their decisions to borrow locally or from abroad. Meanwhile, 22 percent of businesses indicated that their plans to borrow either from domestic or foreign markets are influenced by availability of suitable credit facilities,” read  part of the quarterly report which surveys over 100 businesses based in the country. 

Like previous surveys, most firms still prefer to finance their business operations mainly from retained earnings and loans, rather than using a combination of retained earnings and loans or equity. Retained earnings as a source of finance is more prevalent among the manufacturing, and trade, hotels and restaurants and the transport and communications sectors. Conversely, most of the firms in the finance and business services sector plan to fund their businesses through borrowing.

The survey was conducted earlier this year before the extreme measures were put in place in April. The measures included a nationwide lockdown, which affected business activities. Apart from the fiscal measures unveiled by the government, the central bank increased bank liquidity by reducing primary reserve requirements, and also reduced the bank rate from 4.75 percent to 4.25 percent. 

The monetary policy changes are part of efforts to stimulate demand in the economy, especially in making loans affordable to businesses and households. Though banks have been given favourable terms to write more loans, the lenders will be exercising restraint, fearing to extend credit during uncertain times. 


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