Shylock bankers still want their pound of flesh

Dennis Morrison, Contributor

The announcement by Scotiabank (BNS) a few days ago that it would cut lending rates to its best customers by one point, from 16.75 per cent to 15.75 per cent, was big news. At the same time, it also launched another special loan fund which caters to small and medium enterprises at what it describes as a "concessionary interest rate" of 8.95 per cent. But does this rate cut and special fund really mean that the bank is, at last, passing on the full benefit of falling interest rates to consumers and businesses that are seeking loans?

From what I have been able to glean, Scotiabank's move does not indicate that it is ready to do so. For that would mean altering the basic method of operations of our local commercial banks, which is to make profits by maintaining a wide spread between their lending rates and the rates they pay to depositors. The fact is that as the Bank of Jamaica (BOJ) has been cutting interest rates, BNS and the other banks have dropped the rates they pay to depositors accordingly, but have reduced the rates they charge their customers by much less.

As I have written on another occasion, the spread between the banks' lending rates and what they pay depositors is most glaring in the case of passbook accounts. Holders of this big chunk of bank deposits which is controlled by the duopoly - BNS, National Commercial Bank (NCB) - of traditional banks are now paid virtually nothing, with interest rates as low as 0.25 per cent and no more than 2.5 per cent, even for deposits above $1 million. [These deposits once attracted interest rates above 10 per cent in the 2000s]. Yet these banks turn around and charge their best customers rates as high as 16.75 per cent, or a spread of more than 14 percentage points or even higher in the case of Scotia before this latest move.

Squeezing depositors

It is not only on passbook accounts that commercial banks have slashed their deposit rates in line with reductions in rates set by the Bank of Jamaica. They have cut the interest they pay on investment deposits down to the region of five per cent. In other words, they have maintained a massive spread of nearly 12 percentage points between their lending rates to the best customers - if we use BNS as a guide - and the highest rates they pay on deposits. If the BOJ were to push interest rates lower, what we are likely to see the commercial banks do is to squeeze depositors by further dropping the interest they pay to passbook accounts and other deposits before they nudge their lending rates any lower.

It is out of frustration with this practice and the more recent hikes in bank fees, and even the introduction of new fees, that there has been public outcry and charges of collusion among the banks. In response, the Fair Trading Commission (FTC) undertook a study, Nature and Extent of Competition in the Commercial Banking Sector - December 2010. Not surprisingly, the report finds that the commercial banking sector is highly concentrated, with BNS and NCB, the two largest banks, accounting for 75 per cent of deposits held by the country's deposit-taking institutions.

They dominate by virtue of the fact that, between them, they operate 85 of the 130 branches, or 65 per cent of the banking network, each covering all parishes. This gives these two banks tremendous advantage vis-à-vis small banks in terms of convenience and accessibility, not to mention that they are long-established and household names in every corner of Jamaica. Their scale of operations, the reality that other banks do not have an expansive enough branch network to provide serious competition, and consumers being inadequately informed about banking services allow BNS and NCB the leverage to dictate deposit and lending rates, as well as the scale of fees.

two banks hold the power

Thus, using their market power, these two banks continue to hold on to three-quarters of total deposits and dictate the flow of revenues in the sector. They also determine the level of revenues generated by ancillary services. Indeed, with respect to ancillary services, the FTC stated that BNS reported fee income of approximately $3.5 billion in 2009, triple the level of $1.1 billion in expenses it incurred related to these fees, while NCB earned approximately $4.1 billion from fees, for which it incurred expenses of $1.4 billion. Despite criticism from the Jamaica Bankers' Association that the expenses were understated, the commission has stood by its findings on local banking fees, and has insisted that the figures it used were based on the audited financial statements of the banks.

In this kind of landscape, the duopoly (BNS, NCB) that controls the playing field is not likely to give up profits by cutting loan rates to the full extent of the reductions in rates being paid to depositors. Are borrowers then to be left at the mercy of these dominant banks? The FTC argues that what is needed is more competition, and consumers being provided with adequate information so they can do comparative shopping. It believes, as well, that bringing another big player with extensive branch network on to the playing field would step up competition. But would that necessarily have the desired result?

Dennis Morrison is an economist. Email feedback to columns@gleanerjm.com.