Banks promise to tighten borrowing procedures in 2013



Count yourself among the luckiest people if you still have all the properties you had in your possession at the beginning of 2012.


But for most Ugandans, 2012 was a year they will live to tell because of the massive properties lost to commercial banks for failing to pay back the loans they had acquired to finance their construction projects.



That was the situation for many people as the real impact of high interest rates witnessed in the second half of 2011, throughout 2012 began to bite.
The newspapers’ classified section of advertising was on huge demand by companies that auction and sell property on behalf of the banks, with not less than 10 adverts in a given week, compared to about two or less in 2011.



All this had its roots in 2011 when the economy was battered by double digit inflation, high commodity prices and a weak Shilling.
In response to the bad economic indicators, Bank of Uganda (BoU) increased its Central Bank Rate – the rate at which commercial banks borrow money –from 13 per cent in July to 23 per cent in November, 2011.



Commercial banks also correspondingly hiked their interest rates for both new and old loans from an industry average of about 18 per cent to over 30 per cent.
The high interest rates meant that individuals and businesses that were already financing loans had to pay more than they would have paid, because they took borrowed money at affordable rates.


A combination of expensive loans and high cost of living put pressure on people’s wallets, explaining the inability for most borrowers to meet their loan re-payment obligations.
This drove up the level of bad loans, increasing from 2.2 per cent in December 2011 to 4 per cent in June 2012.



Prior to the tough economic environment, banks had offered loans to many people who may previously not have qualified as they competed to grow their loan books and client base.


BoU records show that loans have been growing steadily since 2007, especially in mortgage, construction and real estate.



BoU director for research Mr Adam Mugume was quoted by this newspaper saying: “Loans to building, mortgage, construction and the real estate sector were Shs226.5 billion in December 2007, Shs586.6 billion in December 2008; Shs639.3 billion in December 2009 and Shs1065.2 billion in December 2010.”
The high interest rates regime, however, dampened the appetite for loans, leaving banks’ loan books constrained, amid low deposits which were also weighed down by the high levels of bad loans.


Despite BoU reducing the CBR from 23 per cent in January 2012 to 12 per cent in December, the lowest since July 2011 when it stood at 13 per cent, most banks’ prime lending rates are still above 19 per cent.



Stanbic Bank managing director Mr Philip Odera told the Daily Monitor in an interview that the rate at which interest rates fall is not only determined by the CBR but also the availability of liquidity or funds in the banking system.



“Liquidity is what governs the pace at which interest rates come down. The CBR may remain flat or high but interest rates will fall if cheap liquidity comes in.
“The only source of frustration for people is that when you take liquidity out from the system, it means that interest rates rise quickly, if you don’t bring back liquidity into the system at the same pace as you took it out, interest rates will come down but at slower pace, Mr Odera said.


He added that once the economy experiences volatilities like what was witnessed in 2011, recovery takes a long period even when you put in the right things in place.



Market analysts predicted that although banks posted impressive profits in 2011, a surge in non-performing loans would pose a big threat to the industry and that banks may not see exciting figures across the board like was the case in 2011.
Ecobank’s managing director, Mr Michael Monari, however, told Daily Monitor in an interview that the institution’s loan book registered moderate growth of over 20 per cent.



2013 projections
In 2013, however, banks plan to tighten the procedure of borrowing to check the high levels of default.


Stanbic Bank managing director, Mr Philip Odera, told the Daily Monitor in an interview that once interest rates finally go back to the levels they were before the tough business environment, banks will be more cautious on how to lend.



“We will be asking a lot more questions before we lend because we don’t want to have the kind of non-performing loans that we have witnessed. We will be asking a lot more questions to ensure that whoever borrows has the capacity to repay,” Mr Odera, who also doubles as the Uganda Bankers’ Association chairman said.
He added: “That’s not an issue of collateral; it’s a question of cash flow. Does this individual or company have the capacity to repay?”
This, he said, will help the industry lower the level of non-performing loans.



Modest growth
BoU Governor, Prof Emmanuel Tumusiime Mutebile, however, said even as the industry continues to sail through a number of challenges, commercial banks registered modest growth in 2012.
Centenary Bank Communications managing, Ms Allen Ayebare, also said although the industry generally suffered from the effects of an economic slow-down, confidence in the sector remained strong.


The industry also registered new entrants including Bank of India, NC bank from Kenya, bringing the number of licensed commercial banks operating in the country to 25, from the 23.


The number, however, reduced to 24 after BoU revoked the National Bank of Commerce operating license on September 27, saying the continuation of its activities was detrimental to customers’ deposits.



Financial anguish
According to BoU, the institution had been suffering financial distress since mid 2010, huge operating losses and its market share of deposits had fallen to 0.08 per cent, far lower than any other bank in Uganda while nearly half of the bank’s loans were non-performing.
This had put customer deposits under threat as the high levels of non-performing loans (nearly half) continued to erode the bank’s capital.
Players, however, anticipate great performance in 2013, as the economy seems to be getting back on its feet.



“We anticipate more significant growth for both deposits and loans in 2013 with more emphasis on deposit growth,” Mr Monari said.
He added: “We also anticipate both deposit and loan interest rates to reduce substantially over the months and stablilse by June 2013. The responsiveness of the industry to these changes will play a big role in the recovery trend of the economy.”


Posted  Tuesday, January 1  2013 at  02:00

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