- But finds comfort in the fact that the central bank indicates that the movement in prime lending rates should be in tandem with the expected changes in the new reference
The bank’s treasurer, Lolo Molosi, said the bulk of the bank’s contracts, especially on the loans and advances, are based on prime lending rate (PLR) that is linked to the current bank rate of 3.75 percent.
Although capping it at 5.25 percent, the Bank of Botswana (BoB) wants to allow commercial banks to independently determine their own prime rates “to ensure an orderly and smooth transition as well as treatment of pricing of existing financial contracts and other products linked to industry prime lending rate”.
PRL is set 150 basis points above the bank rate. When the central bank adjusts the bank rate, the PRL automatically adjusts. However, BoB is decommissioning the bank rate in a in a change of how the monetary policy functions.
The bank rate was arguably inefficient in steering the monetary policy, hence BoB resorted to target bank deposits by adopting and designating the yield on the main monetary operations instrument (currently the 7-day BoBCs) as the anchor policy interest rate. The 7-day BoBC yield was 1.10 percent as at 22 February.
By moving to a different reference rate which should be a tradable reference rate, Molosi worries that it will introduce basis risk to “our current balance sheet”. However, she finds comfort in the fact that the central bank indicated that the movement in prime lending rates should be in tandem with the expected changes in the new reference rate which will be the BoBC rate.
During the six months ending December 2021, FNBB’s balance sheet reduced by 5 percent year-on-year primarily due to the decline in deposits. Gross customer advances declined by 3 percent against market gross advances increasing by 5 percent. “Credit risk remains heightened despite the economic uncertainty having settled considerably,” the bank said, noting that it continues to apply a prudent approach to lending to ensure responsible and manageable consumer exposure.
The bank said its retail advances experienced a moderate decline of 2 percent while the Botswana retail market increased by 6 percent. “The decline was driven by competitive pressures, with the market seeming to relax its risk appetite by extending loan tenures, thus increasing total market debt,” FNBB wrote in its financial results for the half-year ended 31 December 2021. “The bank maintained its existing affordability criteria and a selective approach to retail exposure.”
According to the financials, the corporate segment experienced excellent growth of 10 percent year-on-year. The commercial advances portfolio reduced 15 percent due to a cautious risk appetite as well as a reduction in the Non-Performing Loans (NPL) largely due to write-offs, said FNBB, noting that the combined result of its commercial and corporate advances was a decline of 2 percent against market gross advances increasing by 3 percent. While actively looking for the opportunities arising out of the anticipated recovery pattern, the bank said it will continue to be cautious in maintaining the quality of its credit book.
