Banks applied stricter standards on loans to enterprises in the first three months of 2017 compared to the last quarter of 2016, a Bank of Uganda survey found.
The tighter standards were due to a slowdown in economic activity and the need for banks to improve their loan books following high default rates in the past.
Credit standards for loans to large enterprises were tightened at a faster pace compared to loans to small and medium size enterprises. Large enterprises also faced more criteria to receive bank loans than SMEs.
The tightening of lending standards was applied to all sectors of the economy, with the building, mortgage, construction and real estate sector registering the highest net tightening at 70.1% from 60.6% in the previous quarter.
The reasons given for the sector’s tighter standards was the “long-term funding requirement for most projects in this sector which ideally should be backed up with long-term deposits, low transactions in the real estate market and the high default rates.”
Transport and communication, agriculture, and trade followed, with banks citing adverse weather conditions and high default rates in the sector for the tightening.
The survey also found that three-thirds of Uganda’s banks expect their lending rates to fall in the quarter ending June 2017, while only “1.2% expect the rates to increase.”
The banks believe lending rates will decline by an average of 0.94% during the quarter compared to the 0.78% decrease anticipated in the previous quarter.
The decline will be brought about by a fall in the Central Bank Rate – with banks believing the policy rate will fall further – and stiff competition in the sector, the survey found.
Because of the anticipated easing of lending rates, most banks surveyed expect to ease the margin on average loans and prime borrowers but not for riskier borrowers. However, 50% of the lenders expect to tighten their collateral requirements while only 4% said they will ease them.
A majority of banks, 90.9%, expect the demand for credit to rise in the quarter to June 2017 compared to the 38.5% who did for the quarter ended March 2017. The banks believe more borrowers will be attracted by the lower lending rates, and that economic conditions will improve in the quarter.
Loans to households and individuals
While loan standards for enterprises were tightened in the previous quarter, credit standards to households and individuals were instead eased by 7.3%. This is in contrast to the last three months of 2016 when a net tightening of 11.0% was reported.
Banks said the need to meet their growth targets without compromising the quality of their loan portfolios and the reduction in the policy rate informed the easing of loan standards for households.
Despite this, loan standards to households are expected to become tighter by an average of 13.1% in the quarter to June 2017. “The tightening is attributed to banks effort to improve the quality of the loan books through prudent lending, and focus on less risky loans like salary loans,” the survey says.
Over two-thirds of the surveyed banks expect household’s demand for credit to rise in the quarter.
And just over half anticipate that the default rate on loans to enterprises will increase in the quarter ending June, compared to the 8.5% that expect an increase in the default rate for households.