I have a prayer this Sunday, you could join in and we entreat the ongoing leadership retreat to discuss how they can work with commercial banks to tame interest rates on credit. Amen.
It was great news when Governor John Rwangombwa announced two weeks ago, that in 2014 new authorised loans increased by 38.2 percent to Rwf652.9 billion compared to Rwf472.5 billion lent to the private sector in 2013.
However, considering the high rates at which people are borrowing, banks could be unwittingly breeding a Non-Performing Loan (NPL) crisis to mature in the next few years.
It’s this simple; today’s borrowers might be tomorrow’s defaulters. That’s not because they don’t want to pay but because of the exorbitant interest rates that will force them to pay through the nose until they choke.
The central bank quotes the average lending rates at 17.2 percent in 2014 but you’ll hear tales of up to 20 percent from those who are borrowing.
Of course banks aren’t charities and they have often put across their reasons including high operational costs as well as low deposits home forcing them to borrow outside the economy at expensive rates.
What Rwandan banks are risking now is what the International Monetary Fund (IMF) and Moody’s, a London based rating agency have already warned Kenyan banks about.
In February, Moody’s said the rapid lending growth by Kenyan banks exposes them to the risk of bad loans that the lenders are ill-prepared to absorb.
Moody’s warning came on the heels of a similar notice by the IMF that although the Kenyan banks remained profitable and well-capitalised, a non performing loan crisis was looming.
In the books of the National Bank of Rwanda (BNR), commercial banks here too have a clean bill of health with their liquidity levels way above the required minimum and the sector reported good profits in 2014.
But all falls come after a rise. There’s hunger for credit among the private sector following the Rwanda economy’s return to fast growth in 2014 which is expected to be even faster this year because with the government spending again, suppliers are in business too.
However, to finance their expenditures before getting paid, many have no option but to borrow from banks in order to execute works or deliver orders, even if it means borrowing at high rates.
This past month, two important voices were heard commenting on interest rates; UNDP’s Lamin Manneh warned that high interest rates could be counterproductive as they might result into defaults.
Apurva Sanghi, World Bank’s lead economist for Rwanda, Kenya and Eritrea also expressed concern this week when he pointed out that, commercial banks have failed to respond to BNR’s accommodative monetary policy.
In June last year, BNR slashed its policy rate (the rate at which it lends to commercial banks) from 7 to 6.5 per cent and maintained it throughout the year to encourage more lending to private sector.
Going by the number of new authorised loans in 2014, that objective was achieved but those who borrowed the money are lamenting about the high interest rates at which they have to pay back.
It paramount therefore that during this retreat, leaders brainstorm on what more they can do to get banks address the lending rates; if it means subsidizing banks’ operations, so be it.
You might have noticed lately, an increase in auctions as banks move to recover their money on bad assets, houses and other properties being sold on the cheap either as collateral for loans or bad mortgage assets.
The sad thing is that, banks are not even recovering their money in these auctions; in a recent case, a bank turned out to be the highest bidder in its own auction, because offers from the bidders who turned up were much lower than the bank’s minimum.
So you have banks holding on to various properties which were registered as security for expensive loans; these loans might eventually go bad and banks will resort to selling the collateral, unfortunately, as already seen, no one will offer banks the right price.
In August last year, a friend took out a mortgage for Rwf21 million to acquire a three bedroom house in Kigali; he earns Rwf600,000 half of which is chopped off by the bank every month to finance the loan. It will happen for twenty years.
But after seven months, he wants out! He thinks he signed a bad deal and he now wants someone who can pay him Rwf40 million to settle the bank and use the balance to build a modest home.
It’s astonishing how he got convinced into signing such a deal but 17 percent interest rate on a long term mortgage is simply nonplussing!