The previous column on October 31 (`Bank profit and interest rate: the Brassington thesis’) noted that fee incomes comprise the third largest source of income for the overall commercial banking sector in Guyana. Interest income from loans and the mark-up from foreign exchange trading are the first and second largest sources of income, respectively.
Recently the Bank of Guyana (BoG) proposed to regulate fee incomes – of which there are various kinds, such as ATM fees, a dormant account penalty fee, wire transfer fees, bill payment fees, and requested statement fees. No one knows for certain what are the potential implications of the standardisation of fees. Does the regulation result in an overall improvement after adding up the winners and losers?
Here are some possible scenarios. From a small depositor’s standpoint, the proposed regulation could be seen as enhancing his or her wellbeing since fee cost has to be subtracted from the present paltry deposit rate the person receives. It is safe to say that many individuals, particularly small- and medium-scale depositors, will benefit from the lower standard fees.
From a bank’s perspective, the proposed regulation takes away an important tool of competition. With loan supply largely going to relatively safe borrowers with predictable cash flow, banks can still compete on fee prices. By standardising fees, a potentially important avenue of competition is ruled out for the third largest category of bank revenue.
Conversely, the regulation of fee price could urge banks to enhance competition in service quality. One possibility would be to make sure that it is seamless and easy to set up online banking. Presently, it is not so easy to do this for some people, although I know several young professionals who have made the transition to online banking. I also have anecdotal examples where a bank is not very responsive in this area. Moving more services online would, as of now, tend to benefit middle class folks with easy access to the internet. But it should be no justification for not expanding online banking. The banks will also cut operational costs by expanding online banking.
Nevertheless, it is the task of the government to lay the foundation for fast and reliable internet services so that more individuals could enter into the official banking sector, and promoting the numerous spill-over business opportunities in the non-bank economy. Currently, however, there is a gross misallocation of resources, including foreign exchange, taking place under the name of telecommunication liberalisation in which each internet company runs its own cable to “compete” for the same small market. Owing to poor policy design, telecommunication liberalisation is currently not producing the expected favourable outcomes.
Outside of the fee issue, commercial banks have recently faced criticisms because of the supposedly low loan-to-deposit ratio. A low loan-to-deposit ratio is sometimes interpreted as evidence the banks are not lending as much as they should. As noted in previous columns and by other analysts, the banks do intermediate savers funds into loans. But they tend to lend to sectors they understand that have secure revenues and avoid new unproven enterprises. In any case, we should not expect commercial banks to become investment bankers and venture capitalists given that they are the safe keepers of the nation’s financial savings or deposits. These columns have argued that the inability to have systems to enable lending to new enterprises is another example of policy failure of successive generations of political cadres, not a failure of the banks.
When observing the loan-to-deposit ratio, we should be aware that the banks are the main traders of foreign exchange in Guyana, as they are in other Caribbean and developing economies. The implication here is foreign exchange transactions are continually increasing in the official economy relative to the underground and curb markets. I see this as a favourable development as banks increase their share of foreign exchange trades in Guyana. As at the last quarter of this year, the banks are now buying and selling 99% of all hard currencies. In a 2009 paper – “Analysis of an unannounced foreign exchange regime change” – we observed that this number was 89%.
In addition, the officialization of foreign exchange trades allows the central bank to better manage the exchange rate. There are significant social benefits resulting from a stable exchange rate instead of an unstable outcome driven by curb side trades as the country experienced in the late 1980s and early 1990s.
The loan-to-deposit ratio, furthermore, implies there are higher levels of non-remunerated excess reserves and interest-earning liquid assets in the banking system. There are several main sources of the excess reserves. Suffice to say, some of the main channels come from fiscal expansion, such as the overdraft in the government’s central bank account, and purchase of foreign exchange by the BoG from the non-governmental sector.
Usually, the excess reserves – essentially excess money balances – could find their way into speculation in the foreign exchange market, thus pressuring the rate to depreciate. The excess money balances could also result in a shortage of foreign exchange – an outcome for which there is evidence over the time period when the government accumulated an overdraft. A weaker exchange rate is not good for poor and middle-class folks. Guyana imports virtually all medicines and medical technologies, as well as numerous consumer goods for which there are not domestic substitutes. Foreign tuition and exam fees and airfares are not invoiced in the Guyana dollar. Therefore, a depreciation does not help the education sector either. The depreciation also has adverse implications for business cost of production given that businesses import machines, steel, fuels and almost all other intermediate goods.
The excess liquid assets, comprised mainly of Treasury bills, allow the banks to have ample liquid assets that result in stable portfolios from a macro-prudential standpoint. More stable banks, in turn, are better for the securing of the nation’s deposits – hence, a major service to people who own deposits in the banks. We have seen banking troubles and near default in the late 1990s associated with overly concentrated lending to the rice sector (the EU Other Countries and Territories crisis). Had there been a default, government would have had to bail out banks to secure people’s deposits. A smaller quasi-bank, Globe Trust, failed causing many people, particularly poor individuals, to lose money. Ample liquid assets greatly diminish the likelihood of a bank collapse and circumvent the need for bailouts.
Importantly, also, Treasury bills are a major source of stability for the foreign exchange market – promoting both the availability of foreign exchange and easing the demand pressure. We again have evidence supporting this contention. Over the period of government overdraft, there was a simultaneous reduction of the sales of Treasury bills (see the following paper: “MMT-like activities in a managed exchange rate economy”). Coinciding with the latter was a continual decline in the foreign exchange reserves of the BoG. The conclusion, then, is liquid assets in the form of Treasury bills play a role in stabilising demand for hard currencies and therefore enabling the BoG to better lean against the wind. The overdraft reflected a curtailment of T-bill sales and therefore greater demand pressure for hard currencies.
We still have to explore developments in the local stock market. However, in the next column, I will explore the recent debates surrounding the external debt.
Comments can be sent to: tkhemraj@ncf.edu
