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2014, May 29 - Big firm borrowings expected to grow, credit to small business to remain limited

BAS Bulletin – May 29, 2014
(Extracted from the Observer dated May 28, 2014)

Banks expect medium and large companies to borrow greater amounts in 2014 despite an austere economy, according to additional findings in Bank of Jamaica Credit Survey report.

The borrowing for small businesses will contrastingly remain limited. “For the March 2014 quarter, a moderate increase in the availability of credit to large businesses is anticipated, given the expectation of increased credit to manufacturing, construction and land development, distribution and entertainment,” stated the report .

“In addition, an increase in the approval rates on inventory and other working capital and secured business loans is anticipated for the quarter”.

Large business loans account for 57 per cent of the estimated $173 billion private sector loans, followed by mediumsized firms at 25 per cent, and small firms at 17 per cent.

Total business loans combined, however, account for just over one-third of the $467.8 billion total loans in circulation, with personal credit accounting for some two-thirds, the report indicated.

The survey indicated that banks will exercise caution in issuing loans to small businesses this year in an attempt to minimise non-performing loans. “With respect to credit availability, lenders reported that small businesses were at a general disadvantage relative to their larger counterparts due to their size and capital structure,” said the report.

“In particular, small businesses do not possess the capital levels necessary to provide a buffer against adverse events. Consequently, the quantity of credit made available to these entities is limited and the cost was relatively high.”

In January 2014, the Bank of Jamaica (BOJ) introduced its Credit Conditions Survey to the main lenders in the domestic credit market. The survey aims to increase knowledge of “trends in the domestic credit market”.

In addition, it is envisioned that the results could help to improve the efficiency and effectiveness of the provision of credit by lenders.

The BOJ reported that the interest rates on Jamaican dollar loans to businesses jumped from 13.2 per cent at the end of 2013 to 15.4 per cent in March 2014; personal loans remained flat at 20.6 per cent; while the prime lending rate declined from 18.6 per cent to 18.1 per cent.

Comparatively, the interest rates on foreign currency loans increased from 8.5 per cent in December to 9.3 per cent in March 2014, while the prime lending rate increased from 7.7 per cent to 8.4 per cent

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