Banks penalised for breaching liquidity thresholds
Brian Benza | Friday May 29, 2015 14:53
At a press briefing held by the central bank this week, it emerged that at the peak of the liquidity squeeze, some banks fell below the minimum liquidity threshold and were subsequently penalised by the BoB.
The Banking Act prescribes that commercial banks are required to keep at least ten percent of the assets in cash or near cash local instruments to meet short-term depositor obligations.
Director of Banking Supervision, Andrew Motsumi revealed that the P2.3 billion released into the market proved to be a timely injection for some banks that have now bounced back to healthy liquidity levels.
“After the reduction of the primary reserve requirements we have seen all banks shore up their liquidity assets to meet the regulatory thresholds. At the peak of the liquidity challenges, some banks had transgressed the thresholds and the violations were accordingly penalised as prescribed by the banking regulations,” he revealed.
According to the Banking Act, violation of the liquid asset ratios attracts a penalty of not more than 0.1 percent of the shortfall amount although the BoB can use its discretion to trigger related penalties and increase the amount, particularly for repeat offenders. The liquidity challenges faced by the banks was part of sweeping changes in the sector that was previously characterised by excess liquidity, super normal profits and low deposits rates.
The PRR reduction marked a ‘new normal’ in the banking industry where the central bank’s role has been reversed from liquidity absorption to provision as excess liquidity dried up.
In the past five years, excess liquidity in the banking system as represented by the outstanding Banking of Botswana Certificates (BOBCs) has declined from P17.7 billion at the end of 2010 to P4.6 billion in February 2015.
Contributing to the reduction of excess liquidity in the banking sector was a mismatch in the growth rate of deposits against credit.
Since December 2010 to date, deposits have grown by a much slower rate of 37 percent while credit has grown by 104 percent This resulted in a sharp increase in the intermediation ratio, which is a ratio of bank loans to deposits, from 53.1 percent at the end of 2010 to 87.6 percent in a four-year period to the end of 2014.
While Motsumi declined to disclose the amount of penalties and the number of banks affected, market sources believe that outside of the ‘big four’ most the remaining seven smaller banks could have fallen below the liquidity thresholds.
“It now seems the move to reduce the reserve requirements was meant to assist these smaller banks to meet thresholds and not necessarily boost lending capacities of all banks. Even up to now, some of the smaller banks are not taking a lot of new loan applications, its still tight for them,” said an banking executive with one of the leading banks.
While the reduction of the primary reserve requirements has now turned out to look like a calculated move to aid struggling banks to meet regulatory liquidity thresholds, BoB governor Linah Mohohlo still insists there is and never was a crisis in the market.
Mohohlo noted that the turnabout in the banking sector marks a return to normalcy where instead of the thriving in excess liquidity, banks now have to make extra effort to source their ‘raw materials’.
Before 2010, the banking sector had been characterised by excess liquidity, super normal profits and low deposits rates, making savings unattractive.
“Everywhere else in the world, a normal banking system is not supposed to have such levels of excess liquidity where it reached as much at P17 billion. We are now seeing banks making extra efforts to attract deposits and thus rewarding depositors appropriately and thus better managing their risk.
“We had situations where banks would make tiny profits from simply taking parastatals huge deposits and invest them into call accounts or BoBcs instead of finding viable productive lending options. At the moment excess liquidity has gone up again to around P10 billion, our aim is to bring it down again to the cap of P5 billion
“Although the normalisation of liquidity levels has resulted in some bank tightening their credit policy, this is all good for the market as it improves risk management. Another new positive is that the decline in excess liquidity has seen an improvement in interbank trading market,” she said.
Sitting on over P10 billion in excess liquidity just two years ago, banks did not need to make any effort to attract deposits and offered menial interest rates to those that held any extra cash for savings.
So liquid were the banks that not only did they offer miniature returns but cash deposits also attracted high handling charges, all this contributing to a low savings culture among Batswana.
In 2015 tables have now turned, with the 80 percent drop in excess liquidity forcing banks to aggressively pursue the once unimportant depositor offering lucrative interest rates.
A snap survey of the banks’ deposits rates shows that the liquidity crunch has pushed up the cost of funds for the banks as deposits rates have raised, a development that will further squeeze profit margins in the prevailing low lending rates environment.
Although it registered the highest deposit growth rate among local commercial banks in 2014, Standard Chartered bank is leading the rummage for savers offering an unprecedented “cool’ eight percent return on a fixed one-year deposit of a minimum of P20, 000.