Foreign banks could face new lending practices
| Written by Devapriyo Das / The Observer |
| Sunday, 07 February 2010 17:09 |
 Central Bank Governor – Tumusiime Mutebile
A raft of recommendations to improve the banking sector’s transparency, capital reserves and lending practices is being considered by global financial institutions. The report states that, “Taken together, these measures will promote a better balance between financial innovation, economic efficiency and sustainable growth over the long run.” Uganda is one of those countries that subscribe to the recommendations from the Basel Committee on Banking Supervision – an informal forum that seeks to push for common financial supervisory methods throughout the world. If ratified, financial institutions might limit the scope of customers they lend to, favouring only those that meet the new set of conditions of receiving credit. Any customer who might not meet the new conditions might receive the loan at a higher interest rate as banks cover their risks. Uganda’s commercial banks depend heavily from credit from abroad. The Central Bank is also keen on following the risks within the banking sector. In fact, the bank recently created a risk management department its structure. The report, issued for consultation in December 2009, follows the global financial crisis, which was partly-caused by banks granting massive loans to unviable customers, investing savings in high-risk ventures, among others. The effects were initially felt in the financial sector but spilled-over to the real economy. In response, BCBS recommends rigorous sector supervision. It wants banks to raise both the volume and type of capital and liquidity in reserve. It encourages banks to build stocks of capital during good financial years to use in offsetting stresses in lean years, and to guard against periods of excess credit growth. Last week, China announced similar measures, effectively raising interest rates and forcing its banks to save more. As the crisis was unexpected, the report wants banks to adopt better forecasting methods to estimate probabilities of default on loans, and conduct “stress tests” to observe how their credit portfolio will fare in a recession. It also suggests a global minimum liquidity standard (basic reserves) for international banks, to address short-term capital needs while boosting institutional liquidity. The BCBS is a forum for international cooperation which aims to improve the quality of the banking sector by developing guidelines and supervisory standards. An impact assessment of the standards proposed in this report will be carried out by June 2010. // <
