The COVID-19 pandemic is likely to reduce the demand for credit on account of slackening economic activity, at least in the short-term, Bank of Uganda’s Monetary Policy Report for April 2020 has revealed.
“… given the exposure of Ugandan businesses to the banking system, slackening economic activity will have a toll on Nonperforming loans (NPLs) as these businesses may be unable to service their debt obligations. The sectors that are likely to be most affected include trade, tourism, transportation and construction. Private sector credit extensions to these sectors constitute 45 percent of the total private sector credit,” the report reads in part.
It adds: “Assuming that NPLs in these sectors increase by 50 percent due to fallout from the COVID-19 pandemic, the ratio of NPLs would worsen from 4.7 percent in December 2019 to 5.9 percent in the first quarter of 2020…”
Before lockdown, the report reveals that there was faster growth in lending to trade, building, mortgage, construction and real estate and personal & household sectors during the quarter to February 2020 supported by higher household spending during the festive season.
Average annual credit growth to the trade; building, mortgage, construction, real estate and personal & household loans rose from 12.0, 11.6 and 8.7 percent to 16.9 percent, 13.6 percent and 10.8 percent, respectively in the quarter to February 2020.
Credit to the agricultural and manufacturing sectors also grew but at a declining rate in the three months to February 2020.
The average annual credit growth to the manufacturing sector was 7.0 percent lower than 12.7
percent in the previous quarter while growth in the agriculture sector was 16.3 percent relative to
20.3 percent.
The report says commercial bank lending interest rates remained relatively stable in the quarter ending February 2020, reflecting the eased monetary policy stance. The average commercial bank shilling lending interest rate declined to 19.28 percent in the quarter to February 2020, from 19.32 percent in the previous quarter. This decline was mainly on account of lower rates to the manufacturing, trade, mortgage, personal and household loans and agricultural sectors to average rates of 19.0 percent, 18.8 percent, 22.0 percent, 16.8 percent and 21.4 percent, respectively.
Given the deterioration in macroeconomic conditions and in order to ensure adequate access to credit and the normal functioning of financial markets, Bank of Uganda eased monetary policy in April by reducing the Central Bank Rate (CBR) by 1 percentage point to 8 percent.
“BoU also directed Supervised Financial Institutions (SFIs) to defer the payments of all discretionary distributions such as dividends and bonus payments for at least 90 days effective March 2020, depending on the evolution of the pandemic. This would ensure that SFIs have adequate capital buffers, while supporting the real economy,” the report reads.
