Feb 2009 Financial News

Big banks hike rates - Loans, mortgages affected

Feb 11, 2009

Jamaica's leading banks have increased lending rates, adding two to 2.5 percentage points. This, businesses say, compounds a difficult operating environment in which credit is not only scarce, but those who manage to qualify for loans do so on much harsher terms.

One retailer who describes his operation as medium-sized, says the recent loan-rate increase has adversely affected his business to the point where he has had to send home a couple of his 22 workers.

"I now have to pay the bank $36,000 extra per month on the same loan I have and that means I have to let off two workers. The banks are going to post a big profit at the end of the year, but it is going to cost a tremendous amount of hardship on people," said the National Commercial Bank of Jamaica customer, who spoke on condition of anonymity.

According to the retailer, he has had the business loan, which carries a variable rate, for the past two years and paid $160,000 per month prior to the rate increase. Now, he will pay just under $200,000 per month.

Homeowners, too, have not been spared, with FirstCaribbean Interna-tional Bank Jamaica Limited, for example, adding 2.5 percentage points to its mortgage rate.

The latest move was by Scotiabank Jamaica, which on Friday said it pushed its base lending rate two percentage points higher, from 19.12 per cent to 21.5 per cent, effective January 15.

It follows a January 2 adjustment on Scotia retail loans, which also rose two per cent, while residential mortgages were repriced at 17 per cent.

Other increases

Scotiabank's actions follow less than a month behind National Commercial Bank of Jamaica (NCB), the nation's largest banking outfit by assets and capital base, which tagged on 2.5 percentage points to its rates in December - moving loans from 19.25 per cent to 21.75 per cent.

NCB's foreign currency loans also increased by two percentage points, moving from, 9.75 to 11.75 per cent.

First Global Bank, which is owned by powerful conglomerate GraceKennedy Limited, also tacked on 2.5 per cent to its business loans, which attracted a19.25 per cent interest rate before January, sending them to 21.75 per cent.

FirstCaribean International Bank Jamaica is reporting that its mortgage rates on new loans is now 20 per cent, moving from the previous 17.5 per cent.

Essentially, what First-Caribbean has done translates to a more than 14 per cent increase in the price of its mortgages, while the other banks are selling capital at 10 per cent to 14 per cent higher cost.

Leading residential mortgage financier, Jamaica National Building Society, has moved rates to 14.49 at the top end and 13.75 per cent for persons who qualify for the lowest rate.

The mortgage and commercial bankers are fingering the Bank of Jamaica for their move to hike interest rates, noting that recent increases in the cash reserves ratio - the amount of cash the banks have to deposit with the central bank - have forced them to pass on the higher rates to customers.

"As a consequence of the recent changes in the cash reserve requirement, effective January 15th 2009, all loans tied to base will be affected by this change," Scotiabank said.

National Commercial Bank is singing the same tune. "The BOJ increased its cash reserve requirements - which banks have to observe - from nine to 11 per cent. What that means is for every dollar that we take in, we have to put down 11 cents in cash reserves, authorised by the Bank of Jamaica. (That means) 89 cents are left to us to work our deposits," said Sheree Martin, NCB's group assistant vice-president in charge of marketing and communications.

No comfort to businesses

In addition, the cost to fund loans has also gone up, Martin observed.

"We have to pay higher market rates to maintain appropriate levels of liquidity. So, in the general course of running business, you have to look at what are the costs we are facing and then adjust our pricing on that basis," she told Wednesday Business.

But the banks' explanations are no comfort for businesses operators, reeling from the high costs imposed.

The influential umbrella group of manufacturers, the Jamaica Manufacturers Association (JMA), launched broadside against the managers of the economy in the face of worsening economic indicators, such as escalating interest rates and a falling dollar.

"The measure by the Bank of Jamaica to stabilise the dollar by increasing interest rates is ineffective and has only served to compound the problem by further contracting the economy," the JMA declared.

The central bank should be looking to, "influence the volume and conditions of supply of credit so as to promote the fullest expansion in production, trade and employment," the trade association said.

Milton Samuda, president of the Jamaica Chamber of Commerce, also acknowledged that his members have been finding it difficult to do business with interest rates at their current high levels.

"The Chamber has a concern. We understand that the policy prescriptions available are limited, and we therefore hope that the economic circumstances would change because of the negative effects that high interest rates have on the productive sector," he told Wednesday Business.

Added Edward Chin-Mook, president of the Small Business Association of Jamaica: "It has been dramatic in that for a lot of persons, both interest on loans for business as well as mortgages have been affected and with the downturn in sales, it has actually put pressure on them."

Chain reaction

There are dire consequences for jobs in the current scenario.

"The chain reaction is that you have to then cut staff in terms of looking at your efficiency level," said the SBAJ chief spokesman.

Chin-Mook said most of his members are traders and therefore do not qualify for loans offered under the stimulus package announced by Prime Minister Bruce Golding in December, hence their reliance on expensive commercial bank loans.


Source:
Dionne Rose, Business Reporter
dionne.rose@gleanerjm.com
Jamaica Gleaner
Wednesday February 11, 2009

http://www.jamaica-gleaner.com/gleaner/20090211/business/business1.html