The credit squeeze means those who are not borrowing for commercial purposes have to settle for expensive sources of money, some of them charging over 100 per cent in interest rates.
Dar es Salaam. Commercial banks have just made it more difficult for the average Tom, Dick and Jane to get a loan for personal use, The Citizen on Sunday has reliably learnt.
The credit squeeze means those who are not borrowing for commercial purposes have to settle for expensive sources of money, some of them charging over 100 per cent in interest rates.
Although bankers have not directly admitted it, the authorities are attributing the credit squeeze on personal loans to factors such as the rising default rate, mostly on unsecured loans.
The banks have also tightened their purse strings in an attempt to deal with the huge burden of bad debts in their books. “The BoT has required all banks with non-performing loans above five per cent to put in place strategies aimed at reducing those loans to below five per cent,” Central Bank official Kened Nyoni said recently. “BoT is monitoring the implementation of the strategies.”
According to Exim Bank CEO Dinesh Arora, there are several reasons for the crackdown. “High risk in the personal loans segment might be dissuading the banks from taking on additional exposure to this segment,” he told The Citizen on Sunday. “Non-banking financial companies are increasing their market share, hence meeting the demands of individuals with better turnaround.”
Recent BoT reports show a steady slump in the growth rate of personal loans. The share of this credit category in relation to the total loans provided by commercial banks also does not portray a good trend. It slipped from 20.3 per cent in November 2012 to 17.6 per cent during the same month last year.
According to the latest monthly economic review, the annual growth of personal loans plummeted from 11.6 per cent in November 2012 to 0.1 per cent in October and then stagnated the following month. The annual percentage growth of the banks’ credit for personal loans was 22.7 per cent and 25.4 per cent in January 2011 and 2012 respectively.
Mr Peter Kingu, head of SMEs Banking at the National Bank of Commerce, said the declining growth in personal loans can be attributed to the shift in risk appetite among commercial banks and the current market saturation.
In its Financial Stability Report for March last year, BoT says sectors that absorbed a substantial amount of credit also recorded higher levels of non-performing loans (NPLs).
The top two were trade and personal loans, which accounted for 21.4 per cent and 19.3 per cent of the credit extended by commercial banks respectively. They accounted for 20.6 per cent and 21.8 per cent of all NPLs during the period. Economist Honest Ngowi of Mzumbe University said the credit crunch is worrisome because the restricted lending has come at a time when the middle class is growing. Banks are either not willing or unable to issue personal loans, he said, while there is high demand for the service.
This segment of the financial market has not been properly and adequately served for quite some time, he added. Consequently, individual borrowers have reverted to alternative sources of credit, including micro-finance institutions and informal money lenders.
All these sources of credit attract interest rates of around eight per cent to 10 per cent per month, he said, which works out to 80 per cent up to 120 per cent annually. The interest charged by commercial banks for the same credit service is around 18 per cent to 20 per cent per year.
Dr Ngowi added: “I understand that there are a number of customers wanting personal loans from commercial banks. For some reason, the banks are not issuing the loans. In the aftermath of the 2008 global financial crisis, banks reduced and even stopped some loan categories--including consumer lending--and concentrated on recovering what they had lent.”
