Default rates down
Asset quality – which looks at how borrowers are paying back loans –reported as NPLs as a percentage of total loans declined to 3.8% in the quarter to March 2019 compared to 5.3% recorded in the quarter to March 2018.
This, however, according to the report is a slight increase from 3.4% in the quarter to December 2018. These declines are far lower than the 2016 percentage level of 10.4%.
Though NPLs of trade, personal and household and transport and communication sectors have been on a steady decline from March 2018, the sectors of mining and quarrying and agriculture sectors were the most risky sectors as at March 2019.
This is because mining and quarrying and agriculture sectors registered a sectoral NPL ratio above the industry average of 15.7% and 8.7%, respectively.
In terms of loan requests, loans worth Shs 5.6trillion were applied for during the quarter to April 2019 compared with Shs 5.3 trillion in the quarter to January this year.
However, loan approvals stood at Shs3.2trillion compared with the Shs3.1trillion during the same period under review as banks remained cautious on who to lend based on their capability to pay back.
During this year’s Annual Bankers Conference held on July.16, BoU Governor Emmanuel Tumusiime-Mutebile hinted that the high cost of lending and the limited access to credit was the biggest constraint on Uganda’s economy.
He said that if only banks and other financial institutions could lower their lending rates and expand the volume of their lending, substantial numbers of businesses in the economy would be able to borrow money for investment in order to boost their output while servicing their debt and increasing their incomes.
However, Mutebile, said access to credit is not the ultimate binding constraint on economic growth. He said there’s need to carry out a serious analysis on various factors that affects the economy rather than focusing on only one direction – interest rates.
He nevertheless stated that things could soon improve with the automation of the banking systems, which could drive their costs of operation downwards.
“Through automation and adoption of new technologies for delivering financial services, it is possible for banks to reduce their operating costs, and pass on the savings to borrowers through reduced lending rates,” Mutebile said.
He said BoU remains optimistic that banks will exploit the potential of bancassurance to exploit synergies with insurance to design products for the risky borrowers.
Corti Paul Lakuma, a research fellow in the Macroeconomics Department at Makerere University’s Economic Policy Research Centre (EPRC) says although he does not doubt the central bank figures, growth in private sector needs to be looked at critically.
“One big borrower can affect the entire figure,” he told The Independent adding, “That is the reason we need to do micro/individual borrower analysis.”
However, Lakuma, just like BoU, says PSC stir economic activities in the economy leading to more job creation and increased revenue to the government.
However, he said that reducing interest rates require tangible policy interventions. He said the starting point should be reducing the cost of doing business for the private sector.
He lists interventions such as improving the road network to facilitate easy movement of goods to the market, closing gaps in governance of key government development projects, fighting corruption, providing reliable electricity and aiding farmers with irrigation, fertilizers and other inputs like seedlings.
On their side, Birungi said manufacturers are continuing to push the government to sink more money in the Uganda Development Bank to make it cheaper for manufacturers to access finance on concessionary rates.
He said manufacturers are also waiting to benefit from the $205million that the Indian Prime Minister, Narendra Modi, promised to extend to Uganda in form of loans, when he visited the country in July last year.
On the other hand, BoU says that banks are expected to further ease overall credit standards as the asset quality continues to improve.
“This will in turn boost private sector credit and enhance economic growth,” it said in the MPR report.