By Dennise Williams, Staff ReporterSEVERAL commercial banks have lowered or will be lowering their base lending rates. However, the gap between the rates paid on savings and investment accounts and the interest charged on loans remains significant.
A survey conducted by The Financial Gleaner on April 28, revealed the following base lending rates:
First Caribbean International Bank 19.75 per cent
National Commercial Bank (NCB) 20.25 per cent
Bank of Nova Scotia (Scotiabank) 22.75 per cent
RBTT Bank Ja Ltd. 23 per cent
First Global Bank Ltd. (FGB) 27 per cent
Now both Scotiabank and FGB will be lowering their base lending rates in May to 20.75 per cent and 24 per cent respectively. Additionally, Scotiabank has announced a special $1 billion loan facility for the productive sector at 9.5 per cent. The minimum loan amount is $7.5 million and the maximum is $22.5 million. According to Bill Clarke, managing director at BNS, "Scotiabank is making a reduction in our base lending rate at this time based on our assessment of the current economic conditions. It must be emphasised that interest rates are market determined. Consequently, we must carefully examine the economic fundamentals before effecting reductions to ensure sustainability, market confidence and, most importantly, our credibility as a financial intermediary."
When NCB lowered their base lending rates a few weeks ago, their release stated, "The decision to reduce the base rate at this time is consistent with the NCB Group's objective of building a better Jamaica.
RATE REDUCTION
"The rate reduction is influenced by an increasingly favourable macro-economic environment, the continuing reduction in key interest rates by the Central Bank since the middle of last year and the downward trajectory of market determined yields as evidenced by the most recent Treasury Bill auctions. National Commercial Bank will continue to review its interest rate strategy at regular intervals and make the necessary adjustments as driven by the market." NCB lowered its base Jamaican Dollar lending rate by half a percentage point from 20.75 per cent to 20.25 per cent.
However, savings rates in commercial banks range from 1 per cent to 9 per cent and investment interest rates can go as high as 16 per cent.
In explaining the reason for the difference in rates, Wayne Wray, president of FGB, stated that rates are a function of the market, administration costs and risk. "It is simplistic to say that because the Government reduces rates, the banks must drop their rates. Different products attract different rates.
"Saving accounts are on call or demand accounts that force the bank to have the cash in their vault to meet customer's demands. Repurchase Agreements and T-Bills attract a higher rate because when that money is in the Government's hands, there is no access to the funds. The interest rates paid are an incentive for you to leave the funds on deposit for a period of time. For loans, it's all about what the client brings to the table. I mean credit card interest rates across the board are in the 40s because it is unsecured debt. The base lending rates are just benchmarks. Loan rates are a function of risk, the administrative costs associated with the loan and what the loan will be used for. In fact, there are some cases where a client can get a rate below the base rate. It depends on who sits in front of you and what they have to offer."
LENDING RATES
And when it comes to lending rates, you can't have your cake and eat it too. For those who feel that lending rates should drop with the same acceleration as BoJ open market instruments, then if the BoJ were compelled to raise interest rates, lending rates would naturally follow suit. That would not sit easy with borrowers. Addressing that point, Mr. Clarke states, "Scotiabank did not increase lending rates with the Central Bank (BoJ) undertook an aberrant spiking of interest rates in March last year. With the exception of credit card interest rates, the actual lending rates across Scotiabank's suite of lending products were below the risk-free BoJ one year Repo rate and the 180 days Treasury Bill rate from March 2003 to August 2003."
