AS the Bank of Jamaica’s (BOJ) recent rate cuts spark calls for relief on borrowing costs, Jamaican banks caution that lowering loan rates will take time, just as it did when they gradually increased rates when the central bank was implementing its previous hikes.

“I agree that the banks should look at the rates, but…it’s not a linear relationship between the BOJ’s benchmark rate and the rate at which banks lend,” Jerome Smalling, CEO of JMMB Bank Jamaica Limited, said in an interview with the Jamaica Observer as he responded to queries following calls from business lobby groups for rate cuts.

The lobby groups — Private Sector Organisation of Jamaica, Jamaica Manufacturers and Exporters Association and Jamaica Chamber of Commerce — released a joint statement on December 20, calling on commercial banks to “expedite the transmission” of rate cuts to borrowers to stimulate economic growth.

Their call was made public just hours ahead of the BOJ announcing a fourth-straight quarter-point cut on December 20, bringing the policy rate to 6 per cent, and then itself chiding banks about the lack of movement on reducing their lending rates to borrowers.

“The MPC noted that interest rates on bank loans, along with other credit terms, remain high and restrictive, indicating that banks may have room to make downward adjustments in those rates,” the BOJ said then, in notes accompanying its rate cut.

The central bank itself started cutting rates in August by a quarter percentage point from 7 per cent, and followed up with similar action in its subsequent three meetings in September, November and December to bring the policy rate down to 6 per cent. The next meeting to consider the policy rate is set for February 20.

Still, while acknowledging that banks should start reducing lending rates, Smalling explained why the BOJ’s rate cuts do not immediately transmit to the interest rates consumers are charged on loans.

“The BOJ is not necessarily the source of funds that are loaned by banks. Banks typically are lending depositors’ funds, and the loan rates are going to be reflecting the rate or the cost of funds from the deposit perspective,” he continued.

He pointed out that banks were competing with the BOJ for funds as recently as a few months ago and had to offer higher rates to be competitive. Those rates he argued, are not easily changed.

“So a number of banks are still carrying high-cost deposits, and it will take some time for us to wind down those rates,” he added.

National Commercial Bank Jamaica (NCB), in written responses to Sunday Finance queries on the matter, proffered similar arguments.

“Most of [NCB’s] loans are priced on a fixed rate basis for tenures, which are on average not less than five years. This is to provide borrowers with certainty of the amount of their payment over the life of the loan. Accordingly, those existing borrowers will not be impacted by changes in interest rates during the life of their loans, except in cases where their loan contracts may contain variable rate provisions eg mortgages,” NCB said.

Added to that is the fact that banks have more than $400 billion in excess deposits to onlend, and pay lower rates on them than they would have paid had they borrowed from the BOJ.

Smalling explained further that interest rate changes have opposing effects on different groups, pointing out that when rates rise, those with excess funds benefit, while borrowers suffer and vice-versa, adding that banks must balance these competing interests, aiming to find a middle ground that satisfies both depositors and borrowers.

At the same time, he pointed out lending rates did not go up as much as the BOJ wanted when it was increasing rates between October 2021 to November 2022.

“The interest rates today on borrowing, they do not reflect the significant increase from 0.5 to seven as a benchmark. So, it’s not that we’re so high and our interest rates were reflecting that 7 per cent benchmark. The banks showed restraint. So, really and truly, you will see a gradual movement.”

Similar sentiments were shared by National Commercial Bank Jamaica (NCBJ) which said that during the period of rising interest rates, it made a deliberate choice not to pass on significant increases to its customers.

“This was a clear demonstration of our commitment to supporting Jamaicans through challenging economic times. We absorbed much of the increased costs ourselves to protect businesses and households, ensuring that they remain financially viable,” NCB added.

“Now, as rates begin to decline, we are taking a similarly measured approach. This ensures that we maintain financial flexibility to continue offering competitive rates, supporting innovation, and enabling access to credit for key sectors over the long term,” the bank added.

Smalling expanded the argument pointing out that banks want to reduce rates, because it is in their best interest to do so.

“Because if you look across, like our loan growth and our ability to earn from lending, it has been impacted by the high interest rate regime. And if we don’t reduce our rates and facilitate growth, [and] grow our client base, then it wouldn’t all go well for the banking sector. So I anticipate that we’re going to [cut rates], but there’s a lag effect.”

According to BOJ figures, new loan disbursements continue to decline. Jamaican dollar loan to the private sector in September 2024, declined in real terms by 2.3 per cent relative to September 2023. Credit to households at the end of September was down 6 per cent as consumers reel in spending. Businesses on the other hand, borrowed 1.4 per cent more offsetting some of the decline in consumer loans.

But with the economy slowing quicker than anticipated, Smalling was adamant that banks are willing to play their role in stimulating growth.

“We support the process of also re-engaging and re-igniting growth in the business sector through the lowering of interest rates. So, I mean, we aren’t averse to that. It’s our business. So, it’s a matter of unwinding where we were three, four, five months ago, and unwinding down to being in a position to starting to pay less on deposits and still retain our deposits to the extent that we can continue to lend.”

He said new loans will attract lower rates.

But he pointed to other issues which retard banks actions to cut rates apart from taking signals from the BOJ, especially with people having the notion that banks do nothing other than try to “rip them off”.

“Nobody is on our side, because while the corporate income tax rate has been reduced to 25 per cent, banks are still paying 33 1/3 per cent, and then on top of that, we have to pay the asset tax. “

“Remember, assets include our loans, so when they say grow loans, fund the market, fund the country, and you lend money, you pay a per cent of that asset as tax. It’s not an income tax. It’s just a tax levied against your assets. The more you grow your asset base, the more taxes you’re going to pay, and it’s not an income tax, and you can’t transfer it to the client.”

Banks have been lobbying to have the asset tax removed, and while the Government has acknowledged that it is offensive and distortionary, the $10 billion per year it brings into the treasury is not easily replaced. Smalling said cutting that costs can help banks to reduce rates, and called on the Government to consider abolishing the tax in phases.

“But the thing is, and I don’t expect you to publish this, but we feel beat upon, because everybody beat up on us. Everybody beat upon us to say, oh, we do this and we do that. Nobody’s saying, look at this asset tax, it’s like a contribution to the people of Jamaica, because it’s not an earning tax. It’s just a tax that is levied against our asset base. And we’ve paid it since 2014.”

He said the tax discourages banks from setting up in Jamaica given they can go to other Caribbean islands and face lower operating costs.

“So, those are real conversations, but we understand. We aren’t beating up on the Government. We understand the situation. We understand what we are called upon to do. And we understand the intention of the BOJ in reducing the interest rates. And we are, as far as I’m concerned, we are anxious to reduce rates as well. We are anxious to give people that break, that space in their monthly budget so they can more comfortably afford our loans and not go delinquent. And probably take more too.”

He said while some people may have received salary increases in recent times, inflation over the last few years mean they are not much better off and could do with the relief from lower rates.

“And so, if it is that we can reduce existing loans over time and going forward provide lower rates, I think we’ll give our clients a better opportunity to achieve their financial goals.”

Additionally, it was pointed out that banks like Scotia Group recently posted record mortgage growth with low rates of around 8.75 per cent and that car loans at around 9 per cent show rates are not that bad in the market, even though it was acknowledged that they could be lowered. CIBC itself has also been aggressively growing market share and has included low rates to do so.

But it was pointed out that until rates come down generally, good business clients can negotiate better rates than are on display.

NCB has indicated that it will take a measured approach to cutting rates in the future.

SMALLING…we support the process of also re-engaging and reigniting growth in the business sector through the lowering of interest rates. So, I mean, we aren’t adverse to that. It’s our business