Household credit growth decelerates
Brian Benza | Friday August 22, 2014 13:57
According to a financial statistics report released by the Bank of Botswana (BoB) this week, credit growth by households has eased from as high as 24 percent at the end of 2013 to under 16 percent in May this year.
The development is a reversal of trends in the banking sector where households have been borrowing at an alarming, hasty rate leading to analysts’ call for a policy intervention to monitor the trend. Such a development, say analysts, had the potential to destabilise the financial sector. June Financial statistics figures from the central bank show that year on year, credit growth declined from 15 percent to 13.3 percent, falling 18.4 percent to 15.9 percent for households and from 10.8 percent to 10.2 percent for businesses. “The share of credit to the household sector in total credit fell from 56.8 percent in April to 56.3 percent in May while the amount of credit fell by P142 million in the month,” said the BoB.
However, total credit extended by commercial banks increased by P96 million (0.2 percent) in May to P41.7 billion from P41 billion in April. This was due to increase in loans to resident and non-resident business by P215 million (1.2 percent) and 24 million, respectively.
“The decelerating of credit to households trends are encouraging as there has been concerns about high levels of unsecured household debt and slow growth of business credit,” said Econsult in a 2014 second quarter economic review report.
On the other hand, the IMF has recommended that monetary authorities should consider using macro-prudential measures to contain the growth of household borrowing, including a tighter debt to income ratio, and assigning higher risk weights on unsecured lending to households.
“Data gaps in capturing household borrowing outside the banking system need to be addressed to make macro-prudential tools more effective.
“The continued rapid increase in household borrowing is a potential vulnerability to the financial sector. Discussions with the banks suggest that some households are already beginning to experience difficulties in repaying their debt, although this is not widespread,” said the IMF. While the deceleration has been welcome, market observers also say that the situation would likely be amplified in the event of a return to a period of high interest rates since a vast majority of loans to households are contracted at floating rates. Supported by weakening inflation, the BoB has halved the benchmark bank rate from as high as 15.5 percent in 2009 to the current 7.5 percent in an effort to encourage productive lending.
While households’ loans commitment has slowed down, the uptake of credit by businesses has steadily increased in the past six months in what could be a reflection of improving prospects for the private sector.
Despite the two-percentage point bank rate cut by the central bank last year, which was aimed at encouraging productive lending, credit growth to businesses has been sluggish as households took up the lion’s share of commercial banks’ loans. Analysts have fingered the pessimistic operating environment for the private sector characterised by weakening personal real incomes and government spending restraint for the weak credit growth to business.