The media is awash with several lending campaigns from the leading banks in the country and Ugandans might wonder why this is happening now and who really benefits from them. Who is the target market for these campaigns? Some of these campaigns include lower lending rates so does that mean that interest rates in general are now lower? I want to help the borrower unpack this so that he/she can understand the market dynamics at play and also make an informed decision whether it is ideal for them to consider taking up a credit facility during this lending campaign period that banks are driving.
First and foremost, banks have always had the drive to lend to the private sector. What has hindered this drive lately is the operating environment that has been impacted by the Covid-19 pandemic, which has seen subdued growth in private sector credit on account of relatively low economic activity. What we are seeing from banks are targeted lending campaigns where the ‘sweetener’ might include lower interest rates for customers taking up new or additional credit facilities during the campaign period. It does not necessarily mean that the Prime Lending Rates (PLR) for these banks have dropped, as that will benefit both existing and new customers. Lending rates are at record lows and the Central Bank Rate (CBR) is at its lowest ever since inception. This low interest rate environment helps banks run such targeted campaigns.
The other driver is that banks are holding sizeable positions in government securities than ever before, due to the economic disruption of the Covid-19 pandemic that has impacted aggregate demand. As the yields on government Treasury bills and bonds begin to drop – banks would rather lock in a higher rate with customers using targeted lending campaigns. Otherwise, once economic activity really picks up and aggregate demand returns to pre-Covid-19 levels, the expectation is that lending to the private sector will pick up and so will the lending rates.
The other reality is that as long as we see government’s appetite to borrow continue to finance the government deficit, banks would continue looking favourably to Government paper that yields a risk-free return rather than lending to the private sector where a default risk premium is attached. This crowding out effect means that the lower interest rates being passed onto the private sector only happen if the banks max out their sovereign lending limits, given the returns on government securities. We have seen unscheduled bond auctions and a bond switch auction, where banks are actively participating to place their excess liquidity as opposed to lending to the private sector; due to relatively attractive returns. Slowly banks are getting back to the basics of lending as economic activity picks up.
Banks are holding sizeable positions in government securities than ever before, due to the economic disruption of the Covid-19 pandemic that has impacted aggregate demand. As the yields on government Treasury bills and bonds begin to drop – banks would rather lock in a higher rate with customers using targeted lending campaigns.
The author is the head of credit at Absa bank.