Commercial banks are continuing to hold back their cash, despite having enough liquidity to lend Business Times has learnt.   

While credit to the economy has significantly increased with the volume of new authorized loans in first half increasing by 45.5 percent from Rwf83.8 billion to Rwf121.9 billion, outstanding credit to private sector has only increased by 3.9percent against 6.7 projected. 

"Overall , a current increase in monetary aggregates remains moderate , giving room for further credit expansion for the second half 2010,” the  National Bank of Rwanda(BNR) said last week in its latest Monetary and Financial Stability  Report.

This follows implementation of different measures by the Central Bank and government since mid last year, allowing banks to significantly rebuild their liquidity conditions and lending capacity.

To ease credit conditions while keeping interest rates positive in real terms, BNR reduced twice its key repo rate – the rate at which it lends to commercial banks from 9 percent to 7.5 percent in December last year and to 7 percent in March this year. BNR has gone ahead to keep it unchanged for the third quarter.

"The increase [in loans] is moderate, but combined with our low inflation there is room for further expansion. This is a strong message to the banks to do more than they have been doing to distribute more money in the economy.” Francois Kanimba said last week.

In addition, this reduction in the cost of funds for commercial banks is expected to be transmitted in credit markets by lowering bank’s lending rates.

Yet while generally banks have resumed lending, lending interest rates have continued to rise on average soaring between 17 percent and 24percent with the lowest recorded in March at 16.7 percent.

And though there has been strong recovery in credit distribution process, with new distributed loans significantly higher than last year, they are almost offset by reimbursements being recorded.

The industry watchdog – the Central Bank says banks are concentrating on recovering bad loans distributed before end 2009.   

Specifically banks are under pressure to significantly reduce the number of bad loans technically referred to as Non- Performing Loans (NPLs) that stood at 11percent last year, way below BNR’s threshold of 7 percent each back by the end of this year.

James Ndahiro an official in East African Community, said bankers and government need to create awareness to the public on how to invest and use the loans.

"In the past years Rwandans starved for capital and when some have access to loans its spent carelessly and failure to repay,” Ndahiro said.

Kanimba said a programme is underway with the support from African Development Bank to educate the public on financial services. The monetary authority also said that Rwandans need to develop the culture of honoring their commitment to pay back which ever amount is rendered to them.

NPLs and quality application for loans are the major reasons given by bankers as to why they are still hesitant to give out long term loans regardless of excess liquidity on the market.

For the first half of this year commercial banks recovered approximately Rwf5 billion from bad loans.

For instance, Fina Bank Rwanda, says it is focused on recovering approximately Rwf2 billion from inherited bad loans by the end of this year. This follows its market entry through acquisition of a formerly insolvent private –owned commercial bank known as BACAR in 2004.

"We still have substantial impaired assets from the acquisition of the bank and we are still working on how to get those back. There is room for the next few months and even next year for us to recover quite substantial amounts probably between 1-2 billion in total,” Steve Caley, Fina Bank’s Managing Director told Business Times recently.   

Apart from the bad loans, commercial banks also say that the bad repayment culture within the market has kept interest rates high.

Bankers argue that a reduction in the default rate could significantly bring down the cost of funds.  

"When determining the pricing we are talking about the actual cost of funds, the risk of default, you find that this market has relatively higher cost of default, this also impacts on the cost of lending,” a Banker told Business Times on condition on anonymity.  

Tasked to explain why Banks are not lending  during the presentation of the  Central Bank’ s Monetary Policy Statement  last week,  Sanjeev Anand , the Managing Director of Rwanda Commercial Bank (BCR) pointed out that banks have not been impressed by the quality of proposals being submitted for funding.

"It’s a misnomer that the banks are charging high rates, we are not-And yes, it makes sense for us to loan, but the issue is having the high quality applications.” he said.

The Banker explained that despite the Central Bank’s low interest policy, the pricing of a loan is determined by several factors including the actual cost of funds, risk of default and margin which all impact on cost of lending.

Anand observed that the financial risk of lending in Rwanda is high due to the non-repayment culture leading to relatively higher interest rate charges.

Ends