Why the sudden appetite of banks to lend money?
Interest rates are one of the most important things to watch out for whenever you want to borrow money, especially from a bank.
However, very few people take the time to figure out what the interest rate is, for example when applying for a loan.
An interest rate is either the cost of borrowing money or the reward for saving it, which is calculated as a percentage of the amount borrowed or saved.
This means that the banks borrow money from you in the form of deposits and the interest is what they pay you for the use of the deposited money.
However, banks charge borrowers a slightly higher interest rate than they pay depositors.
Although interest rates are very competitive, they vary from bank to bank. A bank will charge higher interest rates if it thinks the debt is less likely to be repaid.
Lower interest rates
Recently, commercial banks have tended to cut interest rates. As financial analysts call it a “targeted campaign,” the big question is, why the sudden move and appetite of almost all banks to cut their lending rates during this time?
For example, Stanbic Bank Uganda, promised its clients that they would be able to obtain loans from the bank at 15.9% for at least three months until May to finance their various business activities among which the health facilities, education.
Low loan pricing
Mr. Jackson Emanzi, head of loan products at Stanbic Bank, noted that the low loan pricing is intended to encourage potential borrowers with urgent cash flow needs to approach the bank for help.
“These loans are a crucial financial service that can help stimulate businesses and improve the rapid recovery of the economy,” said Mr. Emanzi.
Dr Adam Mugume, Executive Director of Research, Bank of Uganda (BoU) notes that several factors are at play that lead to banks’ appetite to lend.
“First, the demand for credit is gradually picking up. For example, the value of new loan applications was 994 billion shillings in June 2020 and it has averaged around 1.4 trillion shillings per month over the past five months, ”says Dr Mugume.
Second, the yields on government securities, which are risk-free rates, have become reality. For example, the yield on 364-day T-bills fell from 13.8% in January 2021 to 11.7% in March 2021.
“Therefore, with loan interest rates averaging 18% in the 3 months to January, private sector loans become attractive because they give a good return after factoring in any defaults,” explains- he does.
Thirdly, increasingly as the economy gradually recovers from its lowest point in the last quarter of 2020, risk aversion decreases somewhat, which stimulates credit expansion.
Dr Mugume adds: “The extension of credit has increased gradually, not suddenly. With an annual growth rate of 10% in February 2021, going from 6.8% in August 2020 is not a big increase. The annual growth in the granting of credit was of the order of 12 to 15% before Covid-19. “
Why the reader?
Ms Patricia Amito, head of communications and corporate affairs at the Ugandan Bankers Association (UBA), says demand for credit drives lending.
“Many sectors have been affected by Covid-19 in various ways. Some companies have unfortunately closed, others have had to reduce their operating costs, while other customers are pursuing other business opportunities, ”says Ms. Amito.
She notes that the Standard Financial Reporting Structure (SFIS) has also lowered lending rates in an effort to help the private sector recover from the effects of the pandemic.
“The banks were sat on a lot of liquidity for over 12 months because of the foreclosure and the fact that business was slow,” she admits.
However, with the lockdown being lifted in most geographies, including Uganda, supply chains have opened up, businesses are starting to recover, and demand for credit is increasing.
She adds that lowering Treasury bill rates as a monetary policy tool encourages banks to extend more credit to the private sector to stimulate economic activity and recovery.
According to Mr. Guy Lutaaya, Credit Officer, Absa Bank Uganda, these are targeted lending campaigns by banks where the sweetener includes lower interest rates for customers taking out new or additional credit facilities. during the campaign period.
“Most of the lending campaigns that we see being rolled out by banks are aimed at individual borrowers, mainly employee clients. This is a segment where banks feel most comfortable pushing lending in this environment, ”said Mr. Lutaaya.
Given the stressed business environment emerging from 2020 and the fact that a significant share of companies were under credit relief measures – companies themselves are monitoring the economic recovery before making any important decisions in this regard. loan matters; and banks are also cautious in advancing credit in such uncertain economic conditions for businesses.
He explains that as long as we see that the government’s appetite for borrowing continues to finance the public deficit, banks would look favorably on government effects that generate a risk-free return rather than lending to the private sector with a default risk premium. .
“This crowding-out effect means that lower interest rates passed on to the private sector will only occur if banks maximize their sovereign lending limits, given yields on government securities,” he said.
Mr. Godwin Juma, financial adviser, says that due to the impact of Covid-19, the Central Bank has sought to resolve liquidity issues.
He notes that this problem can be solved by increasing their appetite for lending, which is also part of the business movement.
“Banks can only survive by lending to individuals, individuals, businesses or the government. There are also shareholders who want to make money, ”says Juma.