Commercial banks have a considerable amount of money to lend as a result of a huge surplus of liquidity in the banking system, but a slowdown in economic activity means fewer numbers of Bahamians are qualifying for loans, according to local financial experts.
The surplus is around $160 million, which is “quite considerable” for this time of year, Central Bank Governor Julian Francis said Thursday. The normal level for September is about $75 million to $100 million.
“For the time being, there is more money in the system than the banks are able or prepared to lend,” Mr. Francis said.
Last September, the Central Bank placed a lending restriction on banks to protect the foreign reserves from being depleted. For the system as a whole, the restriction limits the total lending to $3.7 billion.
But the banks have not yet reached that limit, so the restriction is not to blame for the excess liquidity, Mr. Francis pointed out.
For the period September 5, 2001 to the end of August, 2002, the banks have operated well within those restrictions and still have a good way to go before bumping up against those limits, he said.
“There is about $150 million of extra room which the banks have right now,” Mr. Francis said. “They can lend that money if they have not yet lent it. The restrictions that we have put on them are not restricting the banks as a whole.”
The surplus is already driving interest rates on deposits down, he said.
“It’s not a very sharp downward trend for the time being, but there definitely has been a very gradual shift down,” Mr. Francis said. “But I want to emphasize that it is only gradual for the time being.”
If there is more to borrow, it costs less to borrow, he pointed out, so more people tend to get loans, which is why the Central Bank restrictions are important. But with the present economic lag, more people are not qualifying for loans.
“If the banks became overly aggressive and were imprudent in their lending activity, then the Central Bank limit would come into play. And those limits are in place to protect the external reserves during a time of relatively slow economic activity when our economy is not generating the level of foreign currency which it would normally generate if the economic activity were stronger,” Mr. Francis said.
The reserves are currently at about $425 million.
A softening of the economy is in some ways being blamed for the present situation.
When economic activity is slow, banks have been known to exercise more caution in lending money, because the unemployment rate also
ﾠﾠtends to dip which forces banks to be more selective in the approval of loans.
ﾠThis means that the banks have to be concerned that people to whom they are lending are going to continue to have their jobs, Mr. Francis said.
The banks have imposed their own limits, he added.
Terry Hilts, vice president of branch banking and corporate affairs at the Canadian Imperial Bank of Commerce (CIBC), agreed that the “the lack of demands for loans combined with perhaps the fact that fewer people are qualifying for loans these days” is contributing to the surplus liquidity.
“Whether there were Central Bank restrictions or not, I really believe that the banks would be hard pressed to grow their portfolios,” said Mr. Hilts, who is also chairman of the Clearing Banks Association.
Mr. Hilts said some of the excess liquidity should dry up by the latter part of the year.
“This is certainly not the first time we have seen surplus liquidity in the system,” he said. “And based on historical trends, I would anticipate seeing some abatement [by year’s end].
He said he could not say how much the demand for loans is down by.
Individual depositors will probably not see much of an impact, Mr. Hilts said.
“In the recent month or so, there has been a softening of interest rates, primarily the fixed deposit rates,” he said.
But Commonwealth Bank Chairman T. Baswell Donaldson said in some cases, short term and long term interest rates have fallen by different levels at some institutions.
“This is not good news for depositors because they are getting less returns on their investments,” Mr. Donaldson said.
He said the future state of the economy would determine a “cure for the liquidity problem.”
“I would think that generally the commercial banks are concerned about this,” Mr. Donaldson said.
Mr. Hilts said as the North American economy improves, people will become more optimistic and will be prepared to spend more and incur more debt.
Some people are working on reduced workweeks and can’t afford to take on any more debt at this time, he said.
As far as the Central Bank restrictions on lending are concerned, Governor Francis said there is no telling when conditions will become conducive to lifting them.
“We normally are not able to foretell the development of the economy. We can make some prognostications, some forecasts as to what might happen, but that’s as much as we can do,” he said.
ﾠ
