WILD COOT: Explaining disparities

THE LAST YEAR that the Wild Coot worked as a consultant inside a bank was 2005 in Antigua and Sao Paulo, Brazil. Perhaps during the last 12 years the art of banking has gone through a metamorphosis unrecognisable.

This is not surprising, as his experience seems at odds with the behaviour of the Central Bank and its relationship with the commercial banks. Let us examine what the Wild Coot lately saw as a disparity in the recent declaration.

It has been declared that interest rates on auto loans were reduced from 7.5 per cent to five per cent. What was not mentioned is the still high profit. An elaboration as to how interest is calculated is necessary. Auto loans interest is not calculated on the reducing balances after each payment is made. If an auto loan for $20 000 is taken out at five per cent over four years payment, interest is calculated from Day 1 to Day 1 461 at five per cent on $20 000, even when the outstanding balance may only be the last payment on the last day of the loan.

In fact, on the example given, the interest alone paid is about $4 000 for a $20 000 loan as against $2 108 calculated on the reducing balance. This is why sweet concessions are offered. To say then that there has been a 1.5 per cent decrease in the interest rate can be misleading as to the profit made on the loan.

If a mortgage was taken out about seven years ago when the rate was fixed at nine per cent then, those old mortgages will still attract nine per cent today and most likely will not benefit from lower rates. A flexible rate may allow the mortgagee to engage the bank for a modern lower rate for three years. Even so, 5.5 per cent allows the bank a spread of four per cent or more. Interest on loans and overdrafts depends on the behaviour of the account and can vary widely – even as high as nine per cent today. In any case, while interest rates on savings can be varied at any time, rates on loans depend on the arrangements. 

With the agreement of the Central Bank, commercial banks and quasi banks have been given clearance to increase the distribution of credit cards. This now has tremendous downward effect on foreign exchange. Banks are able to charge 28 per cent on the residual balances (I understand that islandwide they are high). 

Thus, the average lending rate per bank can be as high as 10/11 per cent against savings rate of .125 per cent. Reducing the savings rate in the face of this is usurious and unconscionable. Look at the spread.

No mention is made of the various ubiquitous commissions. As a matter of fact, one bank proposes to increase its commission on foreign transactions coming to the island by way of cheques or wire transfers as of February 1. All of this in full view of the Central Bank that our citizens, rightly or wrongly, perceive is here to protect them. I am not sure. Poor Mr Abed should not be pilloried for his statement that in actuality is not off base. He who wears the shoe feels the pinch. 

Recent publications of the banks bear out the conclusion that they have substantially reduced their lending on the island but increased the return from loans and commissions. This means only one thing – punitive commissions and higher interest rates. This cannot be good news for our minister of finance in promoting growth.

There is need for a cat among the pigeons. Either we set up our own bank again or we take over one. Taking over means nationalising if no one is willing to sell. That may not be a good image for a country dependent on foreign investors. Let us say then that we set up our own bank. Even if it were to behave like the others with interest rates and charges, the profit would accrue to Barbados in Barbadian dollars. 

Savings are the bedrock of a banking system and of the economy of a country. Barbados has had an impressive savings record that is now being undermined by the way banks treat savings. Without savings there are no loans; no ability to lend to businesses, small, medium or large; no growth. Savings are a constructive way of behaviour of people. Savings offer a nest egg for later years. It does not benefit a country to destroy savings.

The commercial banks must be careful in making statements that will mislead the public as to their modus operandi. It does not favour the commercial banks to see a change in parity. In fact, there should be less talk of devaluation and more of finding solutions even if those with wealth have to pitch in. 

 Harry Russell is a banker. Email quijote70@gmail.com.