BOJ says banks still not generous enough with interest rates:
THE BANK of Jamaica, BOJ, says that while interest rates on bank loans have been decreasing, they are still too high and this has affected businesses which cannot generate a return above the levels at which they are being offered.
New loan rates have declined over the past year and should fall further, BOJ Governor Brian Wynter said at his quarterly press briefing on monetary policy on Wednesday.
He said that from the central bank’s survey of credit conditions, rates on new loans offered to businesses fell by more than 2.5 percentage points over the year to March 2017.
However, noting that the rates are nonetheless still too high, Wynter said that when adjusted to remove the effect of inflation, the rates at March 2017 were around 7.5 per cent.
“This means that businesses that cannot generate a real rate of return above this level cannot successfully approach a financial institution for a loan,” the governor said.
“This must certainly exclude many otherwise viable business opportunities in Jamaica,” said Wynter.
Noting that the BOJ transitioned to the policy rate to that paid on overnight deposits on July 1, the governor said that was a refinement of the bank’s operations, but not a change in monetary policy, which will continue to be accommodative.
“This refinement should improve the monetary transmission mechanism and over time, allow for lower market interest rates, particularly lending rates,” Wynter said.
He pointed out that one of the main factors that affected interest rates during most of Jamaica’s modern history was government’s crowding out of credit to the private sector.
However, that was reversed in recent years in the context of Jamaica’s fiscal responsibility framework and the fiscal consolidation that led to a small fiscal deficit of 0.2 per cent of gross domestic product (GDP) and a large primary surplus of 7.6 per cent of GDP in fiscal year 2016-17.
“The settling in of the institutional reform represented by the fiscal responsibility framework – the fiscal rules – and
the continuation of broad fiscal reforms, taken together with the recent track record on fiscal outcomes give to investors greater and greater assurance that crowding out will not emerge,” the BOJ governor said.
“With crowding out removed, it is easier to see that the large spread between lending and deposit interest rates is a symptom of inadequate competitive behaviour in the market for loans,” he added, noting that it also highlights the problem of poor information and information asymmetry.
Wynter noted that lately they have been seeing increased competition with new commercial bank licensees commencing operations and growing issuance of corporate bonds.
Jamaica National Building Society, which was granted a commercial banking licence, began operations as JN Bank in February this year. JMMB Group announced on Monday the transition of its merchant bank to a commercial banking operation called JMMB Bank Jamaica.
“As competition increases, and as the effects of the still-new credit bureaus flow through the system and increase the availability of quality credit information, we will see these spreads decline further,” the BOJ governor said.
Wynter said the effects of the new bank licensees are only just starting to be felt. “But we can’t stop there. That’s why we are seeking to get done a study of competition in the banking sector in order to inform what policy actions or prescriptions might be required.”
The study is yet to get under way, but he said they will be persisting with it.
At May 2017, preliminary data indicate that the stock of commercial bank credit to the private sector was higher by 31.1 per cent, compared with the previous year, the governor said.
Wynter said that when the impact of a new entrant to the commercial banking sector is excluded, private-sector credit grew by 11 per cent over the same period.
That continued the strong credit growth the BOJ has been seeing, although somewhat weaker than the expansion of 14.4 per cent recorded at May 2016.
Excluding the impact of the new entrant, business lending at May 2017 expanded by 13.6 per cent, slightly higher than the 13 per cent recorded in May 2016, he said. Personal loans expanded at a steady annual rate of 12.2 per cent at May 2017, the same as May 2016.