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Household debt hits 10-year high

Published:Wednesday | April 13, 2016 | 4:00 AMSteven Jackson

Jamaicans are borrowing a lot more from banks with household debt now at a decade high and growing twice as fast as income.

It tells a tale of Jamaicans increasing their personal debt for buying cars, electronics and other items much faster than they are investing in homes, according to the newly released Financial Stability Report 2015 published by the Bank of Jamaica.

Roughly $7 of every $10 of household disposable income goes towards paying debt to deposit taking institutions, a group designation for the various classifications of banks. That compares with less than $5 a decade earlier.

Even a year on year comparison shows that the debt servicing capacity of the household worsened by three percentage points year on year to 69.5 per cent in 2015.

The reason was due to debt rising faster than income, according to the stability report, which provides an annual assessment of the main financial developments, trends and vulnerabilities of Jamaica's financial system. Essentially, debt is growing at double the rate of income.

REVIEW PERIOD

"This out-turn was primarily as a result of the faster pace of increase in household debt of 7.8 per cent relative to growth in disposable income of 3.2 per cent for the review period," said the BOJ, which contextualised the debt servicing to levels well above the global pre-crisis average level of 40.1 per cent.

Commercial banks, which dominate the loans market, had $192 billion of personal loans on their books at September 2015 or just under half of the $406 billion in total commercial bank loans, according to BOJ data.

Personal loans first grew beyond the $50 billion mark in 2006 than surpassed the $100 billion mark in 2011. They are now set to surpass the $200 billion mark in 2016.

The exposure of the banking sector to the household sector, as measured by household debt to assets, increased slightly for 2015 to 23.9 per cent compared to 23.8 per cent at end-2014.

Fortunately for lenders, Jamaican consumers were better at servicing their personal debt last year.

BOJ said the increased exposure of the DTIs to the household sector occurred against the backdrop of an improvement in loan quality. "Specifically, household non-performing loans (NPLs) as a share of total household loans for DTIs decreased to 5.3 per cent at end-2015 relative to 5.8 per cent at end-2014," the central bank said.

Consumer loans grew despite reductions in mortgage rates during the period.

"The expansion in real household sector credit was mainly driven by consumer loans as mortgage credit remained fairly stable," added the BOJ, explaining that real consumer loans grew by 5.8 per cent for 2015 relative to 1.0 per cent for 2014 while real mortgage debt grew by 6.5 per cent relative to 4.6 per cent for the prior year.

"This growth occurred within a context of lower mortgage rates among building societies and commercial banks during the review period. However, while there were declines in the nominal mortgage rates, real mortgage rates increased for 2015 relative to 2014, reflective of the faster pace of decline in the annual inflation rate relative to nominal mortgage rates."

The report described the financial system and its capital adequacy as "robust" due to routinely applied hypothetical shocks during 2015. Additionally, profitability measures for the banking system showed improvements for 2015 due to larger net interest income.

"Along with larger profits, the DTI sector showed improvements in balance sheet indicators of capital to assets, deposits to loans and progressively declining non-performing loans over the year," BOJ said.

steven.jackson@gleanerjm.com