NCB Atrium, Trafalgar Road. - CARLINGTON WILMOT/FREELANCE PHOTOGRAPHER
COMMERCIAL BANKS act as financial intermediaries and provide services to all sectors of the economy. However, it is indeed a competitive environment in which fiscal and monetary policies coupled with market conditions dictate interest rates.
We have noted with great concern the pronouncements of public officials and some interest groups, who are demanding investigations into the operations of commercial banks, to determine whether price gouging is taking place. But even more troubling, is the demand for relaxation of conditions for granting credit. The Jamaica Bankers Association (JBA) considers these outbursts as highly irresponsible, and trust that the Minister of Finance and the regulators will in due course take a stance to denounce such utterances.
The JBA is stating that recent assertions about the level of commercial bank interest rate spreads are basically inaccurate and are for the most part grossly overstated. We therefore wish to state:
a) Commercial bank interest rate spreads are nowhere in the magnitude being reported in the media by special interest groups to be on average 17 per cent.
b) The spreads on commercial loans to the productive sector is significantly less than that for personal loans and instalment credit
c) When interest rates increased considerably in 2003, commercial banks did not increase their lending rates in tandem with the trend
d) The lack of a Credit Bureau in Jamaica means that commercial banks are unable to properly assess the risk profile for both commercial and personal credits.
e) Many loan schemes at concessionary rates remain under-subscribed because companies are unwilling to provide the required documentation or make the required equity injection.
INTEREST RATE SPREADS
According to Bank of Jamaica data on interest rates and interest rate spreads, during the last seven years (1998 - February 2005) commercial banks' spread ranged between 8.77 per cent and 11.96 per cent. On the other hand, the average spread on loans to the productive sector (commercial loans) is below the overall spread and ranged from 7.11 per cent to 11.51 per cent. In fact, in the last five years the spread on these loans reduced annually and at February 2005 was 7.17 per cent. The ongoing reference to interest rates in Jamaica versus our trading partners, would imply a lack of understanding of the dynamics that surround the economies of various countries. A good indicator of interest rates in any economy is the rate at which their government can borrow on the international capital market. Since the Government of Jamaica started to borrow on the international capital market, their borrowing rates ranged on average between 10.5 - 12 per cent for US$ funds. Other governments in the region are able to borrow on the international capital market at rates ranging between three - four percentage points below that which the Government of Jamaica is able to borrow.
PRODUCTIVE SECTOR RATES MUCH LOWER
The spread on commercial loans to the productive sector is significantly less than that for personal loans and instalment credit. For example, in 2004, the spread on personal loans was more than three times the spread on commercial loans and the spread on instalment credit was more than twice the spread on commercial loans. Instalment credit represents primarily term loans to consumers, and personal loans, represents primarily unsecured credit cards. Due to the nature of these credits, with an inherent higher risk attached, the spreads are greater to compensate for the higher level of risk and the unsecured nature of the credit.
COMMERCIAL BANKS HELD STRAIN
When general market interest rates increased significantly in 2003, commercial banks did not increase their lending rates in tandem. In fact, between March 2003 and January 2004, the weighted average commercial bank lending rate (as published by the BoJ) was less than the risk-free rate on the Bank of Jamaica one year Repurchase Agreement.
We therefore find it very surprising that commercial banks are now being called on to reduce lending rates in line with the Government's/BoJ's rate reductions, when commercial banks did not increase their lending rates when rates on GoJ & BoJ instruments were increased.
LACK OF CREDIT BUREAU
As Jamaica does not have a Credit Bureau, commercial banks are unable to properly assess the risk for personal and commercial credits. This means that a higher rate is charged to compensate for the increased risk and delinquency associated with retail and commercial lending. As soon as the Credit Bureau is in place, risk assessment for commercial and personal credits will be significantly enhanced, thus enabling banks to more scientifically price loans based on inherent risk. For in excess of three years, the JBA has been requesting that legislation be passed to facilitate the implementation of a Credit Bureau to allow banks to share information on the credit history of customers. The JBA drafted the proposed legislation and submitted it to the authorities over three years ago, and the legislative process is yet to commence.
CONCESSIONS UNDER-SUBSCRIBED
Currently the Development Bank of Jamaica (DBJ) offers loans to the productive sector at subsidised interest rates.
Members of the JBA have provided a range of special credit facilities targeted at the productive sector at interest rates that oftentimes result in negative returns to the financial institutions. Despite these initiatives there has never been any appreciable resurgence in the productive sector.
In 1998/1999 $1.8 Billion was provided to this sector at a rate of 8.5 per cent, at a time when average lending rate was at 33 per cent. In 2001 - 2002, $2.5 billion was provided to the Development Bank of Jamaica by JBA members, at a rate of 5.5 per cent per annum from funds released by the reduction in Cash Reserves at Bank of Jamaica Bank. These funds were available for lending to the productive sector at a maximum interest rate of 9.5 per cent per annum. In April 2004 another $1 Billion was made available for lending to the productive sector at a concessionary rate of 9.5 per cent per annum.
Whenever concessionary facilities are offered, the institutions often experience difficulties in allocating the funds due to the reluctance of some companies to provide relevant documentation relating to their business, or to inject the requisite equity.
The primary role of Commercial Banks is that of financial intermediation. We have been entrusted with the savings of the people of Jamaica. As a consequence we are obliged to exercise prudence in our lending practices as a means of discharging our fiduciary responsibility.
