How can banks relieve interest rate tension?
THERE ARE $8.2 billion in deposits at commercial banks (December 2012); $1.6 billion in time deposits, $2.4 billion in demand deposits, and $4.2 billion in savings deposits.
What commercial banks are agitating for – the latest First Citizens and Republic Bank (formerly Barbados National bank) – is total freeing up of the interest rate paid on savings deposits since time deposit rates are generally a matter of negotiation.
The Central Bank is reluctant to give full range to the banks where savings deposits are concerned since, as I have said all along, it affects people’s livelihood and many, especially pensioners, depend on the interest.
What the Central Bank has done is to increase the rate paid on savings by a half per cent.
However, the Central Bank wants to isolate savings by individuals as against savings by corporations since corporations sometimes place their excess liquidity in savings accounts.
This does not give the banks absolute authority to determine which account to reduce below 2.5 per cent and which to designate individual, since it is usually unclear what in essence is “corporate” savings.
There will be cases where it will not be clear, so be prepared for a basa basa with the banks.
Frankly, banks have “scotched the snake, not killed it”. The real problem for banks is on the earnings side of the balance sheet.
Look at how credit unions are paying higher rates on their deposits – although they are now beginning to feel the pressure on the loans side of the balance sheet.
Recent attempts to fiddle with the Treasury Bills rate may be an attempt to simply justify them to the banks due to a wider obligation of the Central Bank.
The problem is the prevailing poor economic climate in Barbados, compounded by the harsh measures which stymie spending and the overall circulation of money.
My take on the matter is that the measures of the Central Bank will cause further tension between depositors and banks.
It is questionable how much influence the measures will have over the lending rate. Banks have seen their bottom line move rapidly from an upward tick to a downward spiral.
What the banks will want to do is widen their spread by making reductions in interest paid and at the same time keeping their loan rates high.
Remember, many of the loan rates are fixed. Already banks are under pressure to justify the high fees they are attempting to charge on other services.
If commercial banks were not experiencing so much difficulty with current loans as well as attracting new business, they would be less worried about the interest rate.
One only has to observe the deteriorating social conditions to understand that we are on the wrong track. It is being felt at the heart of the matter.
• Harry Russell, a fellow of the Institute of Bankers, is a retired banker.