Local banks tighten credit standards to enterprises in first quarter of FY 2019/20

In the first quarter of FY 2019/20, local commercial banks tightened credit standards on loans to enterprises contrary to the easing observed in the previous quarter, the Bank of Uganda (BoU) says in a recent survey that was conducted to enhance BoU’s understanding of the lending behaviour and loan financing conditions among the deposit-taking institutions and but also to capture leading information on credit developments.

Credit standards consist of internal banking rules/criteria/guidelines which determine lending based on sector, area, size, duration, financial indicators, what type of loans (collaterised, non-collaterised, investments, overdrafts and amounts to be provided, and to which clients. The survey measures changes in such standards including cases where banks have introduced new lending policies or amended existing ones.

BoU says banks reported tightened credit standards on a net basis of 15.5 percent during the quarter. Across firm size, credit standards were eased for loans to SMEs (6.4 percent), while loans to large enterprises recorded a net tightening of 18.1 percent. In terms of loan duration, banks eased credit standards for short term loans and tightened long term loans in the quarter to September 2019.

According to BoU, the major reason cited for the easing of loans to SMEs and short term loans was the deliberate strategy by banks to grow new lending to SME’s and short term facilities while maintaining good portfolio quality and the impact of International Financial Reporting Standard 9 (IFRS9).

On the other hand, BoU says the approval of loans to large enterprises has tightened as the banks seek to reduce on the large risk exposures and slowdown in economic activities.

However, the central bank reports that in the quarter to December 2019, banks expect to tighten overall credit standards on a net basis, at a much higher pace compared to the previous quarter’s expectations. “The net tightening applies to credit standards on short term loans, long term loans and loans to large enterprises. On the other hand, banks anticipate easing credit standards for only small and medium sized enterprises on a net basis in the coming quarter to December 2019,” it says.

BoU says that the main explanations provided by banks for the expected tightening of credit standards over the quarter to December 2019 include: unstable foreign exchange rates especially the dollar rates which make borrowing expensive, and unpredictability of the markets within the banking sector.

Credit Standards by Economic Sector

Banks reported that they had tightened credit standards for the majority of the sectors of the economy on a net basis in the quarter to September 2019. The following sectors recorded a net tightening; Building, Mortgage, Construction and Real Estate (11.0 percent) followed by Transport and Communication (9.7 percent), Trade (5.9 percent), Manufacturing (5.1 percent), Mining and Quarrying (4.3 percent), Agriculture (2.7 percent), Electricity and water (1.3) and Business Services (0.3) while Personal and Household and community, social and other services eased with 13.8 percent and 0.7 percent, respectively.

The major reason given for the net tightening for Building, Mortgage, Construction and Real Estate sector was the increased price fluctuations within the sector; Transport tightened because of the increased risks of accidents; Trade recorded a net tightening due to the slowdown in economic activities. The tightening to the Agriculture sector was attributed to the declining prices of produce due to bumper harvests with constant demand e.g. sugar.

The survey covered the outturn for the quarter ended September 2019 and expectations for the quarter to December 2019.