A Breath of Fresh Air in a Sea of Debts: No More Residence Repossession by Banks
— V. Lutchmeenaraidoo, Minister of Finance and Economic Development
The level of indebtedness of a country (budget deficit), of the corporate sector or of individuals and households in that country, whether in absolute terms or relative to national GDP, is one of the critical factors which defines its capacity to move along the path of growth or to stagnate. In a capitalist economy the rising level of debt is not a cause of worry per se since it may indeed simply reflect a healthy financial deepening.
In times of economic prosperity – the famous economic miracle of the 80s in Mauritius – the opening of the first “Mammouth” stores contributed to a rise in living standards of the working population who gained access to a whole range of hitherto inaccessible consumer goods through credit financing.
Unfortunately, as with everything else, too much of a good thing can finally turn out to be damaging, especially as in this case, when the economic environment worsens. The sub-prime phenomenon in the US provides the larger-than-life illustration of how this can happen and of its dramatic effects.
In Mauritius many observers including the World Bank have raised the red flag about the increasingly high level of indebtedness of all three economic agents: Fiscal deficit is now above the 60% of GDP considered to be the prudential limit. Other than an implausibly large increase in GDP growth, only drastic reductions in government expenditure coupled with increased taxation would help in reducing this high level of deficit. The present government is clearly banking on the first option.
As for private enterprises they are highly leveraged – their level of debts to equity has been historically very high. In a situation where growth is slow to pick up, one the most critical factors that explains the stagnating level of local investments over the past few years is surely the high level of private sector debt. After growing rapidly it seems to have reached its maximum level – especially in an economic environment of low inflation. The unusually high number of enterprises going into “administration” including some of the most highly regarded ones such as Star Knitwear or the BAI for that matter, are perfect illustrations of this “new normal”.
As regards households the situation is rather dim as they are reputedly indebted to the hilt mostly to “consumer credit” agencies which finance their “hire purchase” agreements. In a September 2015 report the Bank of Mauritius notes that, in spite of a fall in total household indebtedness, the household debt service ratio has remained high in a low interest environment. In other words the ratio of income directed to savings and consumption is heavily impaired.
The only silver lining in the above scenario is that banks in Mauritius have proven to be resilient and have sailed through the repercussions of the Great Financial Crisis of 2008 rather unscathed. In fact they have been reporting considerable increase in profits year on year even during the crisis years, so much so that the last government introduced a special levy on their profits. It is estimated that banks are presently flushed with liquidity (Rs 8 Billion) which cannot be put to productive use because of regulatory constraints or inability of enterprises to take on further debts.
It is incumbent on government and especially the monetary authorities to design tactical and strategic responses to the above situation by striking the right balance between national growth objectives and the stability of the financial system. It is in this context and against the above described background that the Minister of Finance and Economic Development, Vishnu Lutchmeenaraidoo, has announced that government intends to come forward with legislation which will exempt residential property (one assumes the primary residence) from assets which can be re-possessed by a Bank or other financial lending institution in case of default by a borrower.
The least that one can say is that this would indeed represent a breakthrough which deserves to be supported. The introduction of such legislation will certainly come as a great relief to many families who are facing distressful situations as a result of having given their homes as collateral against borrowings from banks. It would also constitute a radical solution to the scandalous situation which prevails in the “Sale by Levy business” which is said to be controlled by a powerful cartel which more or less openly uses sometimes barely legal means to ensure that they keep a close tap on this “market”.
Such a measure is the more welcome to the extent that it obeys to one of the basic tenets of any financial regulatory regime – the weaker player (both in terms of ability to grasp all the consequences of his act and in the power relationship in which he is engaged) always deserves to be protected.
Going by recent experience of what happened when the previous government attempted to introduce a measure with similar effect in the Borrowers Protection Act, however, one would be excused for being sceptical about the eventual materialization of this legislation. As for every such important development this is bound to create winners and losers in society at large.
For starters one should expect some fierce reactions from lending institutions which will leverage their concentration and powerful organizational structures to try and kill this in the bud. In fact one can expect that immediately following the Minister’s statement the machinery has already been set in motion with a view to “influence” the powers that be into a reconsideration of the decision. While there is no point arguing that the application of such a law would not initially cause some agony among the lending institutions, the point is that its introduction would eventually lead not only to increased economic welfare in the medium term but also to a more ethical and civilized society.
Under the circumstances the monetary authorities may have to consider some compensatory action in order to make this more palatable to the “losers” and a win-win situation for the country.