Rawle Lucas is a Guyanese-born Certified Public Accountant and Assistant Vice President of the Lending Services Division.
Mr. Lucas has agreed to serve as a columnist with the Stabroek Business and will be contributing articles on economic, financial and development matters.
By Rawle Lucas
Momentum
It barely registers a blip on the credit screen of commercial banks yet it recorded the biggest expansion in borrowing by households from June last year to June this year. Anyone thinking oil prices or jet fuel is heading in the right direction towards the travel budget of Guyanese. Credit for travel was one of the reasons Guyanese went to the banks for personal financial help over the past year.
Does this mean that Guyanese are ratcheting up personal debt to satisfy their travel needs? I do not think so. In looking at the momentum generated by this category of borrowing, I do feel that debt for the purpose of travel could boost the local tourist industry, a point considered later on in this article.
Borrowing by households to pay for travel grew by 40 percent over the measurement period of June 2007 to June 2008, and by an annual rate of 56 percent from June 2004 to June 2008. This movement is part of an unbroken four-year trend that started in 2005 when households increased their overall borrowing by 17 percent. The increase continued in 2006 when borrowing went up by 20 percent. The good times continued from June 2006 to June 2007 as borrowing by households grew at the even faster pace of 34 percent. Even though the rate of increase has slowed somewhat, households increased their outstanding balances with the commercial banks by an additional 25 percent within the last year.
Share of Credit
The sustained growth in borrowing pushed the share of private sector credit held by households from around 16 percent in 2004 to about 23 percent by June of this year.
This figure was up from 21 percent in 2007 and from an average of 20 percent in 2005 and 2006 respectively. If the trend is anything to go by, bank credit is becoming an increasingly important factor in consumer spending. One piece of evidence is the average loan balance per household. In 2004, the average loan balance was about G$303,000 and, by my estimate, is now close to G$400,000.
Disclosure
With Guyanese households holding nearly a quarter of the value of a major income-generating asset of the commercial banks, there is interest in what the money is being used for. The disclosure of this information has implications for future borrowers, lenders and even local entrepreneurs.
Potential borrowers might want to know which of their preferred expenditures was likely to be favorably considered by lenders. Published information makes this possible. The lenders themselves ought to be interested in knowing which of their products offers the best opportunity for increasing their asset base and generating sustainable returns with the least risk. Local entrepreneurs should be curious too if only to put themselves in a position to assess market potential and to develop strategies for tapping into that potential. The data coming from official sources aid investors in that task.
According to the Bank of Guyana, the money obtained by households from the banking system is spent on housing, motor cars, durable goods, education and travel. Data provided by the commercial banks indicate that personal loans are often used also to cover such things as medical care, engagements and weddings. In my view, these choices reflect the personal preferences and needs of individual borrowers and some of the products on which banks are willing to bet part of their investment stakes.
Realignment
Local entrepreneurs should not turn a blind eye to the converging interests between banks and their customers for several reasons.
One, while the bulk of bank loans go to the business community, the realignment of the loan portfolio of banks in favor of households is unmistakable. Eight years ago, the three sectors of manufacturing, agriculture and mining, for example, accounted for 48 percent of private sector debt. This amount was three times as much debt as was held by households at that time. Today, the three sectors combined hold only 18 percent of private sector debt or 22 percent less debt than is held by Guyanese households.
Opportunity
Two, the composition of the debt portfolio of households may reverse at a later date but the current allocation gives an indication as to where the greatest potential for business opportunity exists.
For example, over the last five years, Guyanese spent an average of one-third of the money that they borrowed on housing. This expenditure involves home improvement or repairs and maintenance of existing structures. Even though borrowing for this purpose seems to have peaked in 2005 and stabilized within the last two years, it remains the biggest reason households go to the banks, a fact worth noting by building contractors. Contractors should keep in mind also that spending on new housing construction is usually viewed as an investment and any renewal or upgrading of the investment would be viewed positively.
Other examples of household debt with favorable business potential are car sales and travel. Car loans account for 27 percent of what households owe the banks, the next highest share of household debt. The current value of car debt represents an 18 percent increase on the amount that was owed to the banks in 2004. Despite this significant change in share of credit from four years ago, the dollar amount borrowed to buy motor cars peaked in 2006 and, as with housing, has remained stable since then. Nonetheless, the size of the debt is proof that banks are willing to fund such sales. Enterprising entrepreneurs with a good business strategy may be able to compete successfully in this market if they can find creditworthy customers.
At the other end of household debt is travel. This category of debt is the smallest share of household debt and accounts for less than half of one percent of the money owed to commercial banks. Debt for travel purposes is beginning to take hold and appears to be gaining in popularity as outstanding balances grow at impressive speeds. Borrowing grew by 26 percent in 2006, by 32 percent in 2007 and by 40 percent in 2008.
In my view, the trend in credit for travel is an area to which operators in the hospitality and tourist industry should pay close attention. Here is why. The share of household credit for travel may be small at this point in time, but the speed of its growth indicates a growing willingness on the part of banks to lend for that purpose. Tourist operators who are struggling to attract foreign visitors may want to consider courting the internal market. Investors with a business model that emphasizes domestic tourism could be in a position to take advantage of households that are willing to borrow and undertake internal travel.
Reality Check
While the preceding discussion offers optimism for entrepreneurs, the internal numbers on household borrowing provide a dose of reality. Guyana does not produce motor cars; nor does it produce most of the items used in housing construction or fixtures used in homes; nor does Guyana operate a national airline. Given this situation, it is conceivable that the bulk of the money borrowed by household ends up overseas because it is spent on imported goods and services.
