Why is bank credit growing too slowly?
— V. Bhardwaj
At last Saturday’s dinner for economic operators hosted by the Bank of Mauritius, the Governor referred to swathes of time during the past decade and a half showing sharply contracting successive paces of growth of bank credit to the private sector. The past five years have accordingly seen bank credit grow at the slowest pace of around 5% in contrast to the preceding periods when it grew by over 15% per annum. In the Governor’s view, commercial banks have not been sufficiently active in this field. This has led to a situation in which an increasing amount of excess liquidity has piled up at banks. In the circumstances, the BoM has had to pick up a substantial amount of banks’ excess liquidity and remunerate the banks therefor.
He is obviously unhappy because he holds the view that instead of leaning on the BoM for getting their surpluses remunerated, banks could have made a greater effort to deploy funds in favour of legitimate sectors of activity, such as SMEs, and hence put the funds to productive use. In this context, he referred to exceptionally high profits being earned by banks for the past so many years. According to him, the average daily profits of commercial banks amount to some Rs 50 million. He therefore held the view that banks could well afford to take some risks by going for more lending to customers instead of being content with making such high profits.
In his repartee, the Chairman of the Mauritius Bankers Association stated that 50% of banking profits mentioned by the Governor appertained to offshore banking; it was therefore not fair to attribute all the banking profits to domestic banking activities. He also expressed the view that it is one of the canons of good banking that banks should take reasonable risks with depositors’ money by lending prudently. Although he appreciated the spirit of dialogue which prevailed between the BoM and commercial banks, it would appear that he certainly did not appreciate being called urgently on a Saturday morning by the central bank to a session of what he qualified as a rapping over the knuckles of banks over an incident. Point taken, but this should not mask the huge profits being made by banks nevertheless from the domestic sector, going by the figures quoted by the Governor.
The two dominant banks in domestic banking are the MCB and the SBM and they account for the bulk of banking profits. Admittedly, those providing domestic banking services are not engaged in charitable activities. However, costs to bank customers have been escalating from year to year. All sorts of fees and charges have been hiked up against the helpless customer. It is not only the net interest income earned by banks with money obtained from customers’ deposits and employed to make loans and investments that jumps to the eye. This net interest income is larger than the amount of interest paid by banks altogether to the depositors, which would appear to indicate that it is the banks, and not the depositors, who are taking higher risks. This cannot be, especially in the case of a banking sector whose ratio of bad debts to total loans has been declining constantly and was in the region of less than 3% at the latest count. It is clear that the banks are employing their dominant market position to charge a variety of fee and non-fee incomes to customers under a cartel (process by which a few operators in an area of activity combine collusively to charge more or less identical fees, commissions, etc., for specific “services”) arrangement. There is no consumer protection association worth its name to effectively defend the interests of customers who are being fleeced by a cartelised banking system in this manner, acting to inhibit borrowing by certain customers. The outcome is seen in the excess profits being made by banks. Bank customers are the victims of these unfair practices.
The parallel for identical abusive market practices is seen in the case of telecoms providers. It is not surprising that with both banks and telecoms providers continuing to reap super-normal profits, Ministers past and present have been charging the two sectors an extra Solidarity and turnover tax to fill the coffers of the Treasury. This approach to taxation does not deal effectively with the market practices adopted both by banks and telecoms service providers in the circumstances. Nor does it deal with the opportunities forgone by the country to have better management practices in these two sectors that hold the key to increasing our economic scope. The tax objective has thus made abstraction of the damage wrought to the country’s economic fabric due to the pursuit of excessive private profits by employing weird management practices to the detriment of consumers.
Coming back to commercial banks, it is evident that they have not ventured out to take their customers to assuming a different set of risks by encouraging them to borrow for undertaking activities in uncharted but promising newer directions. Had it been so, more credit would have been extended by banks to private customers. Financing often leads the market to new and broader horizons of economic activity. That does not happen with a conservative banking sector, the public part of which could have taken the initiative to launch the economy in new directions. How could the latter do so if it is itself often caught in personal and pedestrian power struggles by obscure political lobbyists? If one goes deeply into this aspect of our failed institutional management, it will be seen to have been one of the major reasons why we have failed to realise our full economic potential. As occult pressure groups get rid of the obstacles standing in their way, institutional consolidation takes the backdoor.
Bankers answer that credit is not growing as it should because the world economy has come to a halt. Consequently, the demand for credit has been slackening. This is true where one remains content to wait for one’s traditional markets to rise again. But European countries have not chosen to wait for the American giant to wake up. They have gate-crashed into China and India, which hold promise of the next spurt of economic growth. They are pampering well off consumers in the emerging markets with more sophisticated products than ever before. Other countries like Australia, New Zealand, Singapore, etc., have changed their orientation too. They have spared no financial effort to get their economic agents to go where the money is being made, even if they have not given up on their conventional past partners in trade. All this needs to be financed. The opportunities are around. It is clear that we also can make a non-traditional breakthrough once we decide firmly to depart from a rentier-type of management of our principal economic sectors. The central bank is right to ask for a greater dose of dynamism from the financial market.