Economist Winston Brassington recently told the banking sector that consideration should be given to increasing loans to the private sector while simultaneously lowering interest rates.
With an average of only 33% of assets from local commercial banks loaned out to the private sector over the past ten years, Brassington said that increases in loans by banks to that sector is necessary to avoid “leakage from the economy and a drag on investment and economic growth”. Last year, according to Bank of Guyana data, the loans-to-assets ratio percentage was even lower at some 27%.
“Banking sector returns are lopsided at the expense of the private sector borrowers. Too much of the nation’s savings are not being injected back into economy and serving as a drag on growth. Growth of economy will reflect similar growth of banks deposits and assets and the private sector can benefit from lower interest rates that can approach North American Standards,” Brassington told a banking forum last week. “More lent at a lower rate can compensate for less lent at a higher rate, due to variances in interest rates,” he also posited.
Speaking on the topic, ‘Interest rates, Liquidity and Our Banking Sector’, he added, “Bank profitability will not be harmed if they expanded lending to private sector while significantly lowering rates and expanding tenure.”
“The availability of credit guarantees will alleviate many fears and help resolve such reservations as commercial banks may have when dealing with the small business community. The credit guarantee resolves the matter of collateral deficiencies as well as offsetting the risks of lending to small businesses and compensates for low profit margins,” he added. Brassington focused on the role of banks and the access to loans for the local private sector and pointed out that banks remain one of the most profitable and liquid sectors but suggested – as others have over the years – that they are extremely conservative when it comes to risk taking. He asked the banks to look at their efficiency levels if they expanded lending by increasing terms and conditions and significantly reducing interest rates while simultaneously being less risk adverse.
Bank assets, he said, referencing Bank of Guyana data throughout, have grown by 13.5% per annum in the last 30 years and by the end of last year was $630 B compared to $324 B for non-banks assets (mix: 66% banks; 34% non-banks). Non-bank assets consists of NBS ($73 B, Trust Companies ($12 B), Finance Co’s ($72 B), Insurance Co’s (86 $B and Pension Funds ($81 B). Stock market capitalization, as at September 2020, stood at $368 B versus $69 B in 2010. Of note was that four of the six local commercial banks “are directly or indirectly in stock market capitalization (Republic, GBTI, Citizens via Banks DIH, and Demerara Bank is partly linked to DDL)”. Brassington explained that banks’ assets, deposits, money supply, and the country’s Gross Domestic Product are highly correlated. He reasoned that “if our GDP will triple by end of 2030, then so will bank assets and deposits…The financial sector has just witnessed a pandemic and is still grappling with this…but is the sector delivering capital for investment at competitive interest rates?” he questioned.
He believes that “banks remain one of the most profitable sectors, one of the most liquid, and with wide interest spreads”. And in an era when the world has moved to “plastic” and digitization, the economist and former head of Guyana’s NICIL also underscored that paperwork reduction and digital innovation can drive down bank costs and improve customer service efficiency levels. He said that a benchmark for local banks should to be equivalent to North America standard.
Bemoaned
Local businesses, especially small businesses, have bemoaned not being able to access loans from commercial banks. Easier access to financing, especially for small to medium size enterprises (SMEs) has long been echoed by the private sector and has intensified since 2015’s oil and gas find and the trumpeting by politicians and foreign businesses of the enormous investment potential this country holds.
At a local content Local Content consultation – primarily focused on the oil and gas industry – which was held at the Arthur Chung Conference Centre in February of this year, stakeholders had used the opportunity to request that government legislate for easier access to financing especially for SMEs. Then, Head of the ExxonMobil’s Centre for Business Development Centre that was established to help Guyanese companies to better understand and access opportunities, primarily in the oil and gas sector, by improving their overall competitiveness, had said that sometimes when a company was given a contract they could not accept as they did not have the financial capacity to execute it.
“We have cases where companies have a contract but the requirement of collateral from banking institutions is hampering private sector development,” Director Natasha Gaskin-Peters had told the forum. And when the Private Sector met with government in July last, assistance to access financing again was one of the key focus.
“A number of issues were discussed but the whole issue of local content tied into accessing loans for small and start-up businesses to make them competitive in this emerging oil economy was a key area,” a private sector participant had told Stabroek News following the meeting.
“How do we get Guyanese to get loans to develop businesses and cutting the red tape and overall change of the attitude to especially the banks was discussed. There was a complaint where one business took five days to set up an account and everyone was saying that person was lucky because what happens to the business that takes five months,” another participant said. Some business analysts, economists and even local business persons had suggested government-backed credit guarantee might be also necessary to assist the process. “With many financing constraints burdening our small businesses, government should not hesitate to offer innovative financing strategies for these enterprises. In addition to more financing becoming available to the SBB for its current initiatives to assist small businesses, credit guarantee schemes should be established where government can act as an intermediary between private sector borrowers and lending institutions by guaranteeing entire or partial portions of commercial bank loans,” local businessman Clinton Urling had proffered.
