From health crisis to bank crisis
Correspondent | Friday June 5, 2020 12:39
But back in the capital Gaborone, the city is a gloomy picture. The clicking sound has become the norm and character of the day as bankers hit the keyboards, huffing and puffing, trying to harvest any of the remaining breadcrumbs on relief packages announced by government and leftovers from the pandemic. Are we moving from a health crisis to a bank crisis?
The move by the Bank of Botswana to cut interest rates by 50 basis points from 4.75 percent to 4.25 percent to stimulate domestic demand has seen banks across the banking sector following suit decreasing their prime rates.
The move comes at a good time amid the coronavirus (COVID-19) crisis, as this will reduce the loan tenure or repayment amounts of customers and release pressure from their financial constraints.
However, the move is not all rosy as it is likely to affect bank shareholders as retained earnings will be affected. Dividends are most at risk as banks are likely to slash payments because regulators around the world are pushing lenders to preserve capital during the crisis and instead bolster lending to clients hurt by the pandemic. On the other hand banks will be looking to improve their buffers versus regulatory capital requirements.
Even though there is a rain of money in the economy as legislators are encouraging spending, offering reduced interest rates, consumers will be nervous about borrowing because of uncertainty.
Customers’ behaviour will be important for banks in the coming months.
There is a likelihood that the world is moving from a health crisis to a bank crisis. The government and banks have to come up with robust measures to counter the negative effects of COVID-19 and save the day.
As a result of job losses due to the pandemic, loan defaulters are going to increase, performing loan portfolios will deteriorate and this will have a severe effect on banks’ balance sheets. Potential borrowers will become high risk borrowers because of COVID-19.
In a social distancing world the future of work is in tatters, employers will bring back only a slice of employees, office spacing and professional distancing will be a norm, something which will have a negative effect on banks as their clientele base will be reduced.
For the financial sector, this is not the moment to retreat and backtrack. It should potentially charge into the centre of the deepening crisis and meet it with the full force it requires. For the banks to survive, they should dig deep in their coffers to provide liquidity to create a conducive environment for business trading.
Thanks to the Bank of Botswana, the cost of debts has been lowered. The central bank cutting the repo rate will reduce the cost of debt and the reduction of the primary reserve requirement will add an additional P1.6 billion in liquidity to banks.
Banks should take advantage of all fiscal policies and provisions provided by the government. They should provide recapitalisation loans for sectors heavily in debt, provide bounce back loans for small businesses interest-free for the first year and provide six-year repayment periods to give more room to repay those loans.
Private institutions should also provide liquidity, not just government alone. The government should give private companies incentives to rehire, provide job retention schemes and target more affected sectors like tourism and hotel management as these have been pummelled by the virus.
Increased lending and higher credit provisions due to the coronavirus will cause the banks’ capital buffers to temporarily fall below the minimum threshold set, but waiving and suspension of payments may hurt more than help. Banks are the ones now feeling the full force of the economic crisis brought on by the lockdown of the country’s population. These are difficult times.
Only time will tell whether the proposed measures will bring the economy back to life just like the mighty Thamalakane River in the wild North West.
*Ndipo John is the pseudonym of a civil servant who contributes regularly to Mmegi
NDIPO JOHN*