INDIVIDUALS account for the large chunk of total loans and advances in the six months to June 30 as banks issue shorter dated loans to meet the short-term nature of deposits, a research firm has said.
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According to statistics from the central bank, loans and advances increased marginally to US$3,81 billion from $3,70 billion.
Individuals accounted for 21% of the total loans and advances, distribution (17%), agriculture (16%), manufacturing (26%), and mining with 7%.
In a HY Banking Sector Analysis report, MMC Capital said the large share of individual loans and advances was an indication that although individuals are charged higher interest rates than corporates, interest rates alone have not been a sufficient deterrent to individual borrowing.
“In a highly illiquid environment, individuals tend to be less interest rate sensitive than corporates and banks might be more incentivised to lend to individuals,” MMC said.
The need to match assets and liabilities means that banks prefer to issue shorter — dated loans to individuals to match the shorter-dated deposits dominating the deposits market.
”Banks would thus be lending more to individuals as a risk management strategy whereby extending small loans to a large number of individuals as opposed to lending large amounts to a few corporates reduces the likelihood of large single losses, thus reducing tail risk,” MMC said.
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MMC said the banks’ loan books have shown continued growth in exposure to individual loans at the expense of the more productive sectors of the economy.
“In order to foster meaningful economic recovery, more loans and advances should ideally be advanced to the productive sectors,” it said.
“Market indications are that some individuals borrow to finance their small and medium enterprises, which constitutes productive borrowing.”
MMC said the economic outlook remains fragile and uncertain as the national savings rate sustains a downward trajectory.
It said liability growth will likely remain a challenge as low incomes growth and weak investor confidence would continue to militate against deposit mobilisation from the unbanked population.
MMC warned that the increasing allocation of loans to individuals poses a further cause for concern as this crowds-out the productive sectors of the economy.
“The consumptive nature of individual loans does not bode well for economic recovery. In order to foster positive economic recovery, more loans should be advanced to the productive sectors of the economy,” it said.
“This can however only be done if banks can access long term lines of credit which depends on the country’s credit rating.”
