Banks must reduce high borrowing rates – MP

Labour MP Silvio Schembri says Maltese commercial banks are reaping considerable profits year in, year out, without reducing lending interest rates to help small and medium-sized businesses get any credit.

"Maltese banks have retained higher interest rates than the average of their counterparts in the rest of the eurozone," Schembri, the chairman of the economic and monetary affairs committee in parliament, told MaltaToday yesterday.

Schembri's committee will today host Central Bank governor Josef Bonnici to expand on comments he gave to the Institute of Financial Services' annual dinner, in which he called on commercial banks to facilitate access to credit for businesses.

"I have asked the governor to give a presentation on the huge spread between deposits and lending rates, which is always increasing. From my own analysis, it looks like this is true - in Malta, interest rates for credit stayed high compared to other rates offered in the rest of the EU, while deposit rates stay low."

Schembri said that while the European Central Bank sets the base rate for interest rates, neither the government nor the Central Bank can control the premiums charged by private commercial banks.

"I believe corporate social responsibility demands that banks do not appear as being greedy. This information should be made public, for people to realise the difference between the profits being registered by banks, and the need for greater access to credit for SMEs."

Bank lending to business firms in Malta shrunk "at a record pace", according to data supplied to the European Central Bank, declining at annual decline of 10.4% according to the latest monetary statistics.

The trend confirms a general feeling amongst businesses and SMEs who have found access to credit particularly problematic in 2013.

In its latest monetary statistics, the Central Bank remarked in September that loans to businesses continued to decrease, particularly in the construction sector and the accommodation and food service activities.

Bank loans to the construction industry had increased by a massive €300 million in 2010, to €1.1 billion. Before 2010, the loans to the industry increased by an average of €50 million a year. Since 2010, the rate of bank loans to the construction industry has been decreasing steadily, down to €960 million.

Schembri told MaltaToday that there was a general thirst for credit facilities.

"Banks should reduce loan interest rates as an incentive for private economic growth. The take-up of the Bank of Valletta Jeremie Loan confirms this," Schembri said, referring to the European Investment Fund's Jeremie Initiative (Joint European Resources for Micro to Medium Enterprises). In 2013, 602 loan facilities were granted to 533 SMEs for the value of €48.6 million.

Schembri also said that interest rates for deposit holders remained considerably low compared to high interest rates for loans.

"One of the aims of the Central Bank's presentation in the parliamentary committee is to expose this difference. It's a question of striking a balance between both interest rates."

Central Bank governor Josef Bonnici has called on Maltese banks to reduce their rates for loans to businesses, bringing them into line with their European counterparts.

"Interest rates on loans to businesses are currently around two to three per cent higher in Malta as compared to Germany, the Netherlands, Finland, Austria and Luxembourg," he said.

"A closer alignment of margins with those of our peers appears to be warranted. The recently-proposed Budget measure to conduct a review of bank charges to businesses makes sense. The benefits of having a robust banking sector would then be passed more fully to the rest of the economy," he said.

The government has asked the Malta Financial Services Authority and the Malta Competition and Consumer Affairs Authority to examine the interest rate pass through and to put forward their recommendations.

In reactions to his speech, Bank of Valletta chairman John Cassar White said the high margin between the rates for borrowers and depositors had to be sufficient to make up for credit losses, banking infrastructure, and to give shareholders a fair return.

BOV recently reduced its business lending base rate by 15 basis points while raising rates payable on deposits with a maturity longer than one year, by up to 50 basis points.

An HSBC spokesman said that it was important to maintain a proper balance in the banking system between deposits and loans. "The growth rate in Malta has been above average throughout the economic downturn."

On its part, the Chamber of Commerce has welcomed a Budget proposal for a review of bank charges, but said that it also wants an assessment of the impact that lower interest margins are likely to have on banks, due to tighter EU rules on their capital requirements.