Commercial banks have learned the hard way and are now behaving better after driving themselves into a liquidity crisis that nearly brought them down, the Botswana Guardian has learnt. At a press conference to update journalists on the performance of the banking industry in the past year, Bank of Botswana (BoB) head honchos stopped short of saying banks are now more responsible after the historic turmoil.
Barely two months after the relaxation of the Primary Reserve Requirement (PRR), which effectively injected P2,3 billion into the banking industry to boost liquidity, the Botswana Guardian understands that banks are now more responsible. The scenario is a far cry from the predatory lending that banks practised over long years before it ultimately backfired on them. Speaking barely two months after Botswana’s central bank relaxed PRR, deputy governor Moses Pelaelo says banks have not gone on a spree to offer loans now that they have excess cash. They have become more conservative with cash, says Pelaelo, who is one of the two deputy governors of the central bank.
Banks have become even stricter with their lending criteria. “Banks are likely to ask you (the customer) more questions when requesting for funding than in the past,” governor Linah Mohohlo told a packed press conference earlier this week. In the heyday of super-profits by commercial banks, some shipped out such profits to boost the balance sheets of parent companies.One more observation that BoB has made in recent times is that some banks are now no longer shipping their profits to parent companies after making super-profits Pelaelo has confirmed this: “Some local banks used to take their profits to their parent companies,” he says. “This is now the other way round. Banks are using their profits here.”
British and South African banks such as Barclays, Standard Chartered and First National Banks control the banking industry in Botswana. It has since emerged that these and other banks have become more conservative with the extra P2,3 billion they have at their disposal for fear of another turmoil. “Some have used the money to shore up their liquid assets,” says BoB’s director of banking supervision, Andrew Motsumi. He was responding to a question on how the industry was utilizing funds that have been freed following relaxation of the PRR. Banks are now forced to change as the banking industry landscape is also undergoing changes due to a variety of reasons.
Against the backdrop of poor economic growth, customers have been left with limited disposable income. In a bid to address this, players are now offering ‘correct’ returns on investment for deposits, according to central bankers. In the past, banks charged high interest rates on consumers while the same banks were not adequately rewarding consumers. However, banks are now treading carefully, with banks like Standard Chartered going into overdrive to attract deposits. In one advert placed in various media houses, the Botswana Stock Exchange (BSE) was quoted as saying Stanchart was offering as much as 8 percent interest on one year’s fixed income deposit.
“Others (banks) are now behaving more like family doctors,” a contented Mohohlo told journalists. “They call depositors to ask about their health.” The banking industry is also finding that it has to be smart and adapt to the new landscape for other reasons. In the past, some companies and parastatals such as Debswana used to pay their dividends or proceeds due to government through to banks at a fee. This has since stopped following advice by the central bank. “Money meant for government must come directly to its bank,” Mohohlo said at the press briefing, referring to BoB.
The Governor did not say which BoB advised government against routing dividends due to it through commercial banks. Meanwhile, while BoB has in the past indicated that commercial banks were sound, it has since emerged that during the past months (before relaxation of PRR), some banks that did not keep to the required 10 percent liquid-to-asset ration were fined. The central bank would not elaborate on the wayward banks of the extent of the punishment. “It was not as though the whole banking industry was affected,” Motsumi said begrudgingly. “It was a few isolated cases.” Whereupon Mohohlo added that banks had always been liquid, saying the issue of the liquidity crisis had been blown out of proportion. Nevertheless, the banking liquidity crisis, which BoB did not want to fully acknowledge, was caused by runaway lending by predatory commercial banks. In the end, the banks neglected attraction of deposits, a situation that led to the banks’limited ability to offer fresh funding.
Meanwhile, year-on-year increase in commercial bank credit eased from 15,1 percent in 2013 to 13,5 percent last year, according to the 2014 annual report of Botswana’s central bank. BoB says this is due to a slowdown in growth of lending to the household sector. The fall in household credit was itself due to a sharp decline in mortgages from 40,1 percent to 18,4 percent.