Supporting commercial banks’ initiatives amid COVID-19

COVID-19 has unleashed a global contraction in income and employment and laid the stage for a deep recession. Many are hoping for a short recession despite how deep it may be. Guyana is witnessing a perfect storm emanating from economic losses due to COVID-19, the election uncertainty that started since the No-Confidence Motion, and the collapse of oil prices.
While we address the health impact of COVID-19, with testing, social distancing, and the works, we must be ready, like the rest of the world, to counterbalance the significant loss of income and jobs, as the economy takes a nose-dive from the resulting layoffs, reduction of work time, and significant loss of income to individuals and businesses alike. In the US, fiscal policy in the form of a US$2 trillion stimulus package has been passed, and monetary policy has seen Fed Funds rate at close to zero and 10-year T-Bill rates at less than one per cent. For Guyana, until a legitimate Government is formed, fiscal stimulus is not available. Monetary policy and the role of the banks and other financial institutions will be all that is available to be deployed to assist the economy. A one-arm policy approach for now until a new legitimate Government is sworn in.
The Central Bank should be commended for calling on the banks to provide easing and accommodation for those unable to honour their financial commitments. Republic Bank, GBTI, Scotiabank, Citizens Bank, and Demerara Bank should also be commended for taking the initiative in response to the Bank of Guyana’s call.
To rebuild the loss in economic activity, global interest rates will likely remain low. Central banks will engage in a loose monetary policy supporting low rates and liquidity. Deficit spending will also push more spending from Government and all forms of incentives will be used to provide temporary tax breaks to encourage a reduction of the sudden surge in unemployment.
For Guyana, the moratorium from banks for up to six months is welcome. However, with households reeling from a loss of income and jobs, simply getting a deferral of loan obligations is not likely to be enough to offset the loss of income. Our banking sector needs to be bold and take an additional step. We know that deposit rate is less than one per cent. Perhaps during this period of recovery from COVID-19, our commercial banks could waive any interest charges plus provide additional loans/liquidity. So, apart from the moratorium and providing liquidity via expanded bank lending to customers, this action can allow banks to stop the clock for the borrowers. Allow a short period of zero interest rates for all borrowers and then move rates up to a globally-competitive rate—and not back to the levels pre-recession of 10 per cent and more. This action will allow households and businesses to avoid increasing their debt due to the compounding of interest during the moratorium period, provide liquidity to cushion their loss of income and jobs, and then provide a sustainable path to repay their borrowings, at a lower long-term interest rate and longer repayment term.
Guyana’s banking system has suffered from some structural imbalances. First, banks have only about 30 per cent of their assets loaned out to the Private Sector. This block of their portfolio generally has earned above 10 per cent. The remaining blocks of assets have only earned between one per cent and two per cent. So, loans have provided the bulk of banks’ income (apart from the fees they charge). At the same time, deposit rates are less than one per cent, causing bank spreads (deposit rates vs loan rates) to be quite wide – 10 times in many cases. This position in Guyana contrasts with interest rates in the US where the mortgage and loan rates have been about three to six per cent before the COVID-19 economic crash; these rates may drop given the Fed Reserve’s loose monetary policy. But in any event, Guyanese should be able to look to mortgage rates of four to five per cent in the medium term. The low rates can be fixed in 20 to 30-year tenures. This will certainly spur home ownership, business expansion, and investment.
So, let’s applaud the banks for the first move. At the same time, let’s challenge the banks to be bold. A bank that reduces interest rates from 9 per cent to 4.5 per cent (a 50 per cent reduction) and doubles its portfolio of loans from 30 per cent to 60 per cent of its assets, will make the same profit, all else remaining the same. So, this could be a win-win for the banks and borrowers. Banks expand their portfolio of lending and significantly reduce interest rates on loans, without forgoing profits. Borrowers expand their borrowing at the substantially lower interest rates but feel an earlier rise in equity from the lower interest rate and negative effect of compounding high interest rates. Both are better off.
Assuming a legitimate Government, despite the current drop in oil prices, prospects for Guyana in the medium term, from a low-interest rate environment (both local and foreign) will spur all forms of investment, including infrastructure. With the expected legitimate Government, we can look forward to a reduction in taxes, targeted expenditure that will support households and Private Sector growth, and huge Public and Private Sector investments, including housing and infrastructure. Under this scenario, all boats will rise in the medium to long term. It would be nice for our banks to lead by being ahead of the curve.