Home' Trinidad and Tobago Guardian : August 9th 2015 Contents SBG4 COVER STORY
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt AUGUST 9 • 2015
Interest rates have, of late, become the
centre of interest in local and interna-
tional financial markets. On Wednesday,
July 29, after much supposition about
its actions, the US Federal Reserve kept
its policy rate at 0.25 per cent. However,
many stakeholders believe the Fed will raise
its rate later this year, possibly at next month s
In anticipation of the US central bank
increasing interest rates, the T&T Central Bank
has been increasing its repo rate since Sep-
tember 2014. On July 31, 2015, it increased the
rate by a further 25 basis points. This was the
sixth consecutive increase and this took the
repo rate to 4.25 per cent. Prior to September
2014, the rate had been held at 2.75 per cent
To this base rate, banks add another figure
which takes into account their operating costs
and desired profit margin, to come up with
their other interest rates. One of these is the
prime interest rate. The prime lending rate is
that at which the bank loans money to its best
customers. The Central Bank s Web site cur-
rently lists the average prime lending rate as
8.25. Some commercial banks may have prime
rates higher than this.
Seeing that a great many in the borrowing
public may have less than pristine records,
they---more than likely than not---secure loans
at interest rates that are higher than the prime
lending rate depending on their credit wor-
thiness and what they offer as security.
In September 2014, during an interview
with Chief Business Editor, Anthony Wilson,
Jwala Rambarran, Central Bank Governor, said
he hoped to send a signal to the banks by rais-
ing the repo rate, indicating that the Central
Bank hoped interest rates, particularly those
on savings, would begin to increase.
While financial institutions have been grad-
ually inching various loan rates upwards (Sun-
day BG has reported on increases to mortgages
because of upward adjustment to the MMRR),
interest paid on deposits (savings) and invest-
ments remain low.
At Republic Bank, interest on savings
accounts range between 0.10 per cent and
0.25 per cent.
At Scotiabank, they are between 0.00 and
0.50 per cent.
At RBC, between 0.15 and 0.65 for high
interest bearing accounts.
Meanwhile at the Unit Trust Corporation
of T&T, the TT Income Fund is paying 0.92
per cent on deposits, while its US Income
Fund is paying 0.81 per cent. The rates slightly
are higher at ANSA Merchant Bank, where its
TT Income Fund pays an interest rate of 1.7
per cent and the US income fund pays 1.5 per
However, when compared to interest rates
on loans, there seems to be a wide gap between
For example, at the RBC, fully secured per-
sonal loans carry interest rates of between
eight and 10 per cent, while partially secured
and unsecured loans are between 12 and 20.75
Shouldn t interest rates for savings be rising
along with those for loans?
Recognising the problem, Finance Minister
Larry Howai told CNC3 Business Watch report
on Friday that he planned to meet with the
Central Bank to discuss low deposit rates.
What s behind the disparity?
There are a few concepts that need to be
understood. One of them is "spread." A bank s
spread is the difference between what it charges
for loans and what it pays on deposits. This
is how the bank makes money.
At first glance, the rates given above give
the impression of huge profits for banks, given
the distance between the two interest rates.
But Darryl White, managing director of RBC
Royal Bank (T&T) Ltd and the president of
the Bankers Association of T&T said this was
According to White, interest paid on savings
deposits is largely determined by supply and
demand for money and does not automatically
rise in tandem with those on loans.
Banks need to have deposits. To attract
them, they post an interest rate that would
encourage customers to place money into their
accounts. The banks then lend this out and
this essentially is the demand. However, current
excess in supply keeps deposit interest rates
low, the BATT president explained.
"The CBTT hasn t tampered with supply
which remains relatively high, while there is
not as much demand for loans in the current
environment. Therefore, banks do not need
to raise interest rates to attract increased
deposits, as they have more than enough to
meet the needs of borrowers. The most recent
data show that commercial banks excess liq-
uidity exceeds $3 billion," said White.
Along with excess liquidity and lower
demands for loans, the bank must consider
its profitability or, the spread. If loan rates and
deposit rates are the same, banks won t make
money and would not be able to meet oper-
ational costs. There has to be a differential
between the two.
In an interview last Thursday White was
asked whether the wide gap between deposit
and loan interest rates was fair to consumers.
He said that bank spreads have actually been
decreasing over the past few years.
Tough times for banks?
"In 2000, the spread was 9.15 per cent.
Now, the spread is 7.05," White said.
Referring to the rates quoted by the Sunday
BG in its illustration, the BATT president said,
"The average spreads are much lower. The
weighted average loan rate is now 7.6 per cent.
Loans in T&T are the lowest ever."
Items with the highest rates, such as credit
cards, White said, only made up a small part
of banks books and carried those interest
rates, because of the level of risk associated
with them as unsecured lendings.
White also said banks can only lend out a
percentage of their deposits. He said while
some banks lend around 57 per cent of their
deposits, the percentage at RBC was lower.
The result is, if there is a smaller pool of
funds to lend out in the first place, then the
bank s earnings will be smaller.
He also said the loss of some of banks
biggest customers as contributing to lower
"You have people going to capital markets
to raise money now. All these big companies,
the government, they don t borrow from the
banks anymore. The banks arrange the debt
for them, but it s not on their balance sheet.
When people talk about the spread and the
earnings, they need to bear that in mind."
In tandem with lower earnings, White said
banks have been facing steadily increasing
"You have to pay your salaries, pay your
operating costs, pay to keep your lights on.
All of these are costs that have been going up
over the years. If you look at the bottom line,
the profitability of banks, tell me if the prof-
itability of banks has been going through the
roof in terms of their core earnings.
"That is why you have banks going outside
trying to buy banks. Because they want to
drive their earning potential in markets where
they can get better spreads than in Trinidad.
There are many banks here. It is very com-
petitive. Because of that, banks are competing
on price for the customer and the customers
The Bankers Association president said the
institutions must also make provisions for
credit losses, something that puts further strain
on banks performing assets.
"When you write off a credit loss, you kill
the earnings of so many good assets. If I write
off a million dollar debt, how many assets
does it take me to earn a million dollars in
principal? Probably around $11-12 million in
assets are worth nothing to you when you
write off $1 million in principal. That means
part of my books are not earning anything
because they are writing off bad debt," said
A "nonsense" argument
Asked to respond to claims that the banks
approached the Central Bank to have the rates
increased, White said, while bankers may be
given a hearing, ultimately, the Central Bank
decides upon policy directions that are good
for the country and not just for particular
"Whether or not it is said bankers have
been pressuring the Central Bank to raise rates,
is there a broad view that interest rates are
too low? I am a banker and I have had that
view. I think a number of bankers and even
economists have that view as well.
"When interest rates are too low, it creates
a couple of things. They can create asset bub-
bles. People don t see any financial instruments
to invest in, so they go toward assets. Or some-
times, if you have a strong stock exchange, it
could create an asset bubble there. Why it s
a bubble? You have too much money chasing
the same asset and, like most assets, they
eventually burst because the asset is overval-
He also said from a policy point of view, it
made sense to try to stem the flow of money
out of T&T. He said given the level of inter-
connection between our interest rates and
exchange rate policy, it was either the Central
Bank devalue currency, raise interest rates, or
take both actions.
Ultimately, White noted, that even though
the repo rate had moved, it will take time for
deposits interest rates to follow suit.
Managing director, RBC
Royal Bank (T&T) Ltd
Continued on Page 5
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