Not widespread
The year 2011 was one in which Guyanese went to the banks for additional cash to spend on their household needs. Their visits to the banks not only resulted in substantial profits for the financial institutions, but also in a 15 per cent increase in the amount that they owed to the banks when compared to their outstanding balances of 2010. The double-digit expansion in debt marked the second consecutive year in which the outstanding balances of households grew by more than 10 per cent, demonstrating an increasing reliance on the banks to meet their personal needs. The two consecutive years of growth counteracts a three-year period that saw households scale down their borrowing and the amounts owed to the banks. Despite the recent upturn, Guyanese households have still not returned to the days of large scale borrowing as in 2005 and 2007 when bank balances expanded by 25 and 35 per cent respectively. The expansion in borrowing is a good sign for the economy since household spending accounts for more than half of the revenues accruing to factor incomes, and Guyanese were sustaining their purchases with the borrowed funds. Household debt is needed to keep the Guyana economy going. The developments over the past two years, though encouraging, are not widespread enough to reach a majority of Guyanese and to make a major impact on communities.
Identifiable categories
Guyanese households borrow money to purchase a range of goods and services. According to the Bank of Guyana, households take money from the banks to purchase cars, to improve their homes, to spend on education, to travel, to buy durable goods such as furniture and washing machines, and for several other purposes. The largest identifiable categories of household spending continue to be home improvement and motor vehicles. They are the principal reasons that households go to the banks for money. Despite their prominence, the share of outstanding balances attributable to home improvement averaged 28 per cent, down from the 32-per cent high that it enjoyed a few years ago. The purchase of motor cars accounted for an average of 24 per cent of the borrowed funds by households over the same time period. That also fell two percentage points from its high of 26 per cent a few years ago. The miscellaneous category of items which could include medical expenses saw the largest increase in the share of the outstanding balances. It accounted for about 42 per cent of household borrowing during the period in review. A few years ago, the miscellaneous category of items ballooned and was responsible for nearly 50 percent of the borrowed funds. However, that figure has come back down and has settled around the 44 per cent mark in the last two years. Among the smallest share of borrowed funds are education and travel. Together, they account for less than five per cent of the money owed by households to commercial banks.
Stimulating effect
Annual data show that the funds that households borrowed from the banks made up about 31 per cent of the funds that were loaned to the private sector. Despite the growth, the stimulating effect of borrowing is not that noticeable in some key macroeconomic variables. It remained stable as a share of deposits. Except for real estate mortgages, no other grouping in the private sector has been borrowing more than households. The money used by this group of consumers makes up an estimated 10 per cent of the money supply of the country. As a sign that households are finding it difficult to maintain the higher borrowing trend, household loans as a share of private sector borrowing fell from 30 per cent in 2010 to 28 per cent in 2011. The money borrowed by households for use in the economy remained stable at five per cent of income and nine per cent of private consumption.
Debt obligations
The amount of money acquired from the banks for home improvement increased by 22 per cent over the 2010 figures. Guyanese also used more borrowed funds to purchase motor cars, durables and other types of goods and services. Funds to buy durables went up by 10 per cent while funds used to buy miscellaneous goods and services increased by 11 per cent. Money for education purposes also registered an increase of 16 per cent. Unlike 2010 when travel saw a 91 per cent jump in outstanding balances, households reduced their dependence on borrowed funds for travel purposes by nine percent in 2011. Yet, the trend over the last five years is not that encouraging for the loan business in education, durable goods and travel. Outstanding balances for education declined by one per cent while those for durable goods fell by six per cent. The balances for travel saw the largest decline with a 19 per cent drop in funds owed to the commercial banks. In contrast, the larger categories of loans for vehicles and home improvement registered higher growth of eight and 11 per cent respectively.
In addition, the overall positive movements in the outstanding balances of Guyanese were not enough to alter the relationship between debt and the money supply in 2011. Nor has it altered the relationship between household debt and bank deposits. Both have remained stable at nine per cent. The more interesting revelation is the relationship of household debt to disposable income. The ratio of household debt to disposable income hovers around 24 per cent. Even though more work needs to be done, it should be obvious that, even with the raising of the income tax exemptions, households at the lower end of the income scale will max out the tolerable levels of debt-to-income ratio quickly. They are, in effect, shut out from the loan market, and would find it difficult to participate unless special concessions are created for them. Such consumers would have to rely more on significant amounts of remittances to stay in the consumer game.
Successive decreases
It is not clear what is responsible for forcing the change in attitude among household borrowers. Part of the demand for borrowed money could be influenced by the duty-free concessions that many qualifying public servants receive and by the demand for cars for the taxi business.
It is quite likely also that many households might have become more sensitive to changes in interest rates, and the increase in borrowing is being influenced by the successive decreases in the interest rates charged by commercial banks. While interest rates vary among banks, according to the Bank of Guyana, the average lending rates of the commercial banks in Guyana fell from 11.95 per cent in December 2010 to 11.68 per cent in December 2011.
During this period, the cost of money to households fell by an average of two per cent. The lending rates fluctuated during 2011 and were as low as 11.58 per cent in October and November last year. It is reasonable to believe that if rates continue to fall, the rise in household borrowing might be sustained for a long period, even though rate changes would not be enough to get low-income workers into the credit market.
