Overall decline in credit availability in September quarter
BOJ data show slight drop in interest rates on new local currency loans
There was an overall decline in the availability of credit during the September 2020 quarter, according to the latest data coming out of the Bank of Jamaica (BOJ).
The contraction in credit availability was evident in the supply of credit to businesses, but there was also no growth in the supply to individuals, based on the BOJ’S latest quarterly credit conditions survey (QCCS). This survey is designed to elicit qualitative information on changes in the demand and supply of credit to various types of businesses as well as individuals.
The contraction observed in the supply of local currency credit made available to businesses was reflected in all industries, except construction and electricity & water, as the credit availability to these sectors was unchanged. The September 2020 survey was conducted between October 14, 2020 and November 9, 2020.
Some lenders in the survey indicated that the increased risk posed by the novel coronavirus pandemic forced them to reduce available credit. Other lenders reported that in response to reduced demand by businesses they made less credit available for that category of lending.
LARGE BUSINESSES ACCOUNTED FOR LION’S SHARE
The allocation of credit to businesses relative to personal loans was broadly unchanged for the September 2020 quarter. In relation to the business portfolio, large businesses continued to account for the largest share of the portfolio at end of September.
Growth in credit demand, as measured by the Credit Demand Index (CDI), increased for the September 2020 quarter, relative to the June 2020 quarter. Based on the survey, which is conducted online on a quarterly basis among commercial banks, building societies, near banks, credit unions and development banks, an index less than 100 indicates a decline in the particular variable, whereas an index greater than 100 indicates an increase in the variable in question. The CDI for the quarter was 105.8 relative to 89.6 in the previous quarter.
The increase in credit demand reflected a significant increase in demand for personal loans, while demand by businesses declined. The increased demand by households was in part due to individual’s optimism about the economy as more people returned to work, even in the midst of the pandemic.
The acceleration in the growth in credit demand by individuals during the review quarter was reflected in an increase in the growth in demand for all categories of personal lending, in particular mortgages, other lending secured on real estate and motor vehicle loans.
For the December 2020 and March 2021 quarters, lenders indicated that they expected an increase in the overall demand for credit, particularly by individuals and to a lesser extent by micro, medium and large-sized businesses.
This reflected respondents’ continued optimism regarding the country’s economic recovery.
DECLINE IN INDICATIVE INTEREST RATES
Based on the survey responses, the average indicative interest rates on new local currency loans declined by approximately 269 basis points (bps) to 13.14 per cent during the review quarter, relative to the previous quarter. This reflected a decline of 332 bps in rates for business loans, while there was a decline of 17 bps in the rates for personal loans.
According to the survey, “Lower rates on business loans were primarily reflected in loans to micro, medium and large-sized firms. Respondents indicated that the lower rates reflected their attempt to provide support for businesses. Conversely, the average indicative interest rate on new foreign currency loans rose by 25 bps to 7.67 per cent, which reflected higher rates to micro-sized businesses.”
For the December 2020 quarter, lenders reported that they plan to increase interest rates on new local currency loans by 153 bps to 14.67 per cent. “However, they will reduce rates by 11 bps to 14.56 per cent for the March 2021 quarter,” the survey report prepared by the BOJ’S Intelligence Gathering Unit, Statistics Department, and Research & Economic Programming Division stated.
The increased rates for the incoming quarter relative to the review period are expected to be applied across all categories of lending. For foreign currency loans, respondents indicated their intention to increase loan rates in the December 2020 quarter by 67 bps to 8.35 per cent and will carry through to the March 2021 quarter.
The increase is expected to affect mainly small, medium and large-sized businesses.