Positive economic outlook linked to credit expansion
Lenders have reduced interest rates on non-credit card loans and extended maximum credit lines for unsecured loans in response to increased competition in the commercial-banking sector and favourable macroeconomic conditions.
Those changes in lending policies continue to support a recovery in credit expansion, according to the findings of the Bank of Jamaica (BOJ) quarterly credit-conditions survey for December 2015.
"In particular, lenders cited that increased competition, owing to the announcement of a new entrant in the commercial-banking subsector, and favourable macroeconomic conditions, encouraged them to increase their risk appetite in order to maintain their market share," said the survey report.
"As a result, lenders reduced interest rates on non-credit card loans and extended the maximum size of credit lines for unsecured loans during the review quarter," according to the report, circulated in the BOJ's quarterly monetary-policy report released last week.
For the March 2016 quarter, lenders anticipated further easing in credit market conditions, particularly for secured loans. Policies associated with unsecured loans were also expected to ease, albeit at a slower pace than in the December 2015 quarter, the report said.
The central bank said it is anticipated that this easing would be reflected in declines in the minimum proportion of balances repaid and fees applicable to unsecured loans.
Notwithstanding this, lenders noted that the uncertainty created by the prospects of an early general election and possible associated changes in government policies may temper the overall buoyancy in lending conditions for the March 2016 quarter.
Lenders reported continued expansion in the availability of credit during the fourth quarter of 2015, and reflected increases for both local and foreign currency lending facilities which were made accessible to both businesses and households.
"Of note, there was a decline in the proportion of credit made available to businesses, with a notable redistribution from large corporations primarily to medium enterprises," the report said.
Respondents indicated that given a saturation of the market for lending to large corporate entities, there was an increase in loan-promotional activities geared towards medium-size firms during the quarter.
Respondents cited the improved economic outlook and increased risk tolerance as the main factors influencing the expansion in credit supply.
For the March 2016 quarter, lenders anticipate a further increase in overall credit availability, reflecting expansions in all loan categories.
That expansion should be influenced by continued improvements in the economic outlook and positive changes in lenders' risk appetite. In addition, some banks indicated that the anticipated improvements in liquidity in the March 2016 quarter could result in a higher-than-anticipated expansion in credit supply.
CREDIT DEMAND RISES
Demand for credit in the December 2015 quarter rose to its highest level since the survey's inception in the December 2013 quarter. The uptick in credit demand mainly reflected significant requests for business loans, reversing the historic trend of the demand for personal loans outpacing that for commercial credit.
The increase in business-loan demand was underpinned by robust growth in the demand for local and foreign currency-denominated loans.
The survey results showed that demand for local currency loans emanated across all business segments, particularly from medium and micro firms in the distribution, professional and other services, as well as electricity, gas and water sectors.
The uptick in demand from those sectors was evidenced by increased requests for unsecured loans and loans for inventory and other working-capital financing.
In addition, a few respondents suggested that they opted to take advantage of the improved economic outlook by undertaking minor investments and designing new loan products to target clients with riskier profiles.
The increased demand for foreign currency business loans was only reflected in large and medium enterprises, particularly those in the manufacturing and distribution sectors. Lenders attributed this increased demand to perceived improvements in macroeconomic conditions.
According to the survey results, average interest rates on local currency loans declined for the December 2015 quarter while rates on foreign currency loans increased. The reduction emanated from a decline in the interest margin on business loans, which may have partially influenced the upsurge in the demand for those loans, the report said.
The BOJ said that overall, the fall in lending rates may have been facilitated by more buoyant Jamaica dollar liquidity flows during the December 2015 quarter. However, some lenders specified that establishing the perception of financial strength by providing loans at competitive interest rates helps to stimulate credit demand and maintain lenders' market share in a context of changing market dynamics.
With regard to the rise in interest rates on foreign currency loans, some creditors cited the depreciation in the exchange rate as the most significant factor that has impacted the cost and availability of funds.