Banks are increasingly tightening lending to large enterprises while easing credit extension to households, a new survey by the Bank of Uganda (BoU) has indicated.
According to the lending survey conducted by BoU’s Statistics Department in the first quarter of 2019/20, credit standards on loans to enterprises were tightened contrary to the easing observed in the previous quarter.
This development is set to slowdown business expansion, production and job creation. This might affect the country’s economic growth in the long run.
“Banks reported tightened credit standards on a net basis of 15.5 percent during the quarter. Across firm size, credit standards were eased for loans to SMEs (6.4 percent), while loans to large enterprises recorded a net tightening of 18.1 percent,” the report obtained by Business Focus reads in part.
It adds: “In terms of loan duration, banks eased credit standards for short term loans and tightened long term loans in the quarter to September 2019.”
The survey report says that the major reason cited for the easing of loans to SMEs and short term loans was the deliberate strategy by banks to grow new lending to SME’s and short term facilities while maintaining good portfolio quality and the impact of IFRS9 (International Financial Reporting Standards 9).
“On the other hand, the approval of loans to large enterprises has tightened as the banks seek to reduce on the large risk exposures and slowdown in economic activities,” the report reads in part.
Credit standards consist of internal banking rules/criteria/guidelines which will determine (based on classifications by sector, area, size, duration, financial indicators, etc.) what type of loans (collaterised, non-collaterised, investments, overdrafts etc.) and amounts to be provided, and to which clients. This survey measures changes in such standards including cases where banks have introduced new lending policies or amended existing ones.
Banks further eased credit standards to households and individuals on a net basis by 33.3 percent, higher than the net easing of 2.1 percent observed in the previous period.
The easing was mostly driven by the demand for loans due to the opening up of third term hence the need for school fees payments.
The survey captures past and prospective developments in the credit market. The survey is designed to complement existing quantitative data on credit and lending rates.
The survey covered the outturn for the quarter ended September 2019 and expectations for the quarter to December 2019. 24 commercial banks and 10 non-bank deposit-taking financial institutions in Uganda participated in the survey.
Banks further reported that they had tightened credit standards for the majority of the sectors of the economy on a net basis in the quarter to September 2019.
The following sectors recorded a net tightening; Building, Mortgage, Construction and Real Estate (11.0%) followed by Transport and Communication (9.7%), Trade (5.9%), Manufacturing (5.1%), Mining and Quarrying (4.3%), Agriculture (2.7%), Electricity and water (1.3) and Business Services (0.3) while Personal and Household and community, social and other services eased with 13.8% and 0.7%, respectively.
“The major reason given for the net tightening for Building, Mortgage, Construction and Real Estate sector was the increased price fluctuations within the sector; Transport tightened because of the increased risks of accidents; Trade recorded a net tightening due to the slowdown in economic activities,” the report says, adding: “The tightening to the Agriculture sector was attributed to the declining prices of produce due to bumper harvests with constant demand e.g. sugar.”
Outlook
In the quarter to December 2019, banks expect to tighten overall credit standards on a net basis, at a much higher pace compared to the previous quarter’s expectations.
The net tightening applies to credit standards on short term loans, long term loans and loans to large enterprises.
On the other hand, banks anticipate easing credit standards for only small and medium sized enterprises on a net basis in the coming quarter to December 2019.
“The main explanations provided by banks for the expected tightening of credit standards over the quarter to December 2019 include: unstable foreign exchange rates especially the dollar rates which make borrowing expensive, and unpredictability of the markets within the banking sector,” the report reads.
On a net basis, banks expect to ease majority of the price terms and conditions in the quarter to December 2019 for their prime borrowers and on average loans, but to tighten for risky loans.
According to the survey report, the easing of price terms and conditions for prime borrowers is based on; the need to remain competitive in the market so as not to lose their good clients, provision of flexible borrowing solutions to clients and the stability of the CBR at 10 percent has further stimulated business thus reducing the cost of financing.
Similarly, in the quarter to December 2019, banks expect to ease credit standards to households at a slower pace (a net easing of 3.0%), compared to the previous quarter which had a (net easing of 10.7%).
“The expected easing is attributed to the need to meet the set growth targets without compromising on the portfolio quality and attraction of more clients by providing them with suitable products,” the report says.
Credit demand by households is expected to increase greatly in the three months to December 2019 with 68.5 percent of banks anticipating the demand to rise.
This is a more ambitious expectation compared to the 37.9 percent that expected demand to grow in the previous survey results.
“The anticipated increase in demand is attributed to the increasing desire for loans as a result of the need for financing especially for consumption purposes, and purchase of durable goods like land and cars to meet their end of year objectives,” the report adds.
In the next three months to December 2019, the report says, the default rate on loans to both enterprises and households is expected to increase on a net basis, respectively.
