Banks are not bankrupt-BoB
Commercial banks are as fit as a fiddle, this is the message that Bank of Botswana top bankers sent out to inquisitive journalists this week after reports surfaced that the sector might be headed for another liquidity crisis.
Last month, Econsult’s quarterly research bulletin suggested that the banks are once again struggling to generate loanable funds. At a Press briefing this Tuesday, Director of Research and Financial Stability, Dr Tshokologo Kganetsano said there is no need to panic as the sector is still strong.
The sector, which is half the size of the economy, nearly collapsed on its knees two years ago, after it emerged that banks’ ability to lend fresh loans were limited on the backdrop of a liquidity squeeze, forcing the central bank to inject more funds to keep the industry afloat.
“Banks are not broke. They are still able to lend,” he said, adding that even if deposits for banks fall, some of the banks have issued bonds whose proceeds they are using to prop-up their lending capacity.
In their report, Econsult which is directed by former Deputy Governor, Dr Keith Jefferies, pointed out that banks are on shaky grounds. “Worryingly, there are increasing signs of stress in the banking system, on a number of fronts.
“First, banking liquidity has been falling steadily for some time, but the decline has been particularly sharp since the beginning of 2017. Excess liquidity fell to 2.6 percent of banking assets in April, the lowest since the “liquidity crisis” of late 2014,” said the report.
Kganetsano made it clear that if indeed the banking sector was in a liquidity crisis, the central bank would have relaxed further the Primary Reserve Requirement (PRR) to unlock further cash into the sector.
In 2015, BoB under Linah Mohohlo was forced to avoid embarrassing liquidity squeeze by cutting the bank’s PRR by half to release P2, 3 billion to bail out the sector which is controlled by British and South African banks.
Some of the local banks have their funds deployed with their parent banks, which can be readily used if the local banks are unable to generate loanable funds.
At the same Press briefing that was meant to announce the Monetary Policy Committee (MPC) bank rate decision, the central bank was forced to move away from tradition and had Kganetsano present on the liquidity levels in the sector.
He stated that as of June 2017, the highest liquidity level at one of the banks stood at P2 billion whilst the lowest was P23 million. “For a small bank, P23 million is a huge amount,” he stressed.
Some of the smaller banks in Botswana include State Bank of India, Capital Bank and Bank of Baroda. Larger banks include Barclays Bank Botswana, First National Bank Botswana, Standard Chartered Botswana and Stanbic Bank Botswana, one of which could have had P2 billion as ‘free cash’ in the above period (June 2017).
Meanwhile, Governor Moses Pelaelo explained that, as far as they are concerned ‘no customer has been turned away’ by any bank citing lack of funds to lend them. In fact, the central bank has been using various instruments to mop up excess liquidity which shows that banks are still sound and safe.
“We don’t have any liquidity crisis,” Kganetsano stressed. Nonetheless, central bank made it clear that liquidity is not the same as in the past when diamonds sales were up and government spending was also on the rise. “Remember, liquidity changes every time,” he added.
In the same statement that announced that lending rate has been maintained at 5, 5 percent for the fourth time this year, the central bank added that, ‘the potential for banks to expand credit provision continues to be supported by a stable financial system and sufficient liquidity in the banking system.’
Pelaelo, who read the MPC decision this week, said the level of BoBCs and balances held by banks abroad in part represent excess liquidity which is available for lending. According to the central bank, annual increase to commercial bank credit leapfrogged by 4, 1 percent in June 2017, compared to 7 and 5 percent the year before.
Lending to private businesses expanded by 9, 5 percent up from 7, 5 percent the previous corresponding period. Household credit grew by 5 percent as compared to 12 percent in June 2016.