President and CEO of Scotia Group Jamaica, Bruce Bowen (left), speaks at the launch of a concessionary 9.95 per cent loan facility called the Scotia Productive Sector Growth Fund, on Monday, October 12, at the Knutsford Court Hotel in New Kingston. Omar Azan, president of the Jamaica Manufacturers' Association, is at right. - Ricardo Makyn/Staff Photographer
Scotiabank Jamaica has opened up a $500 million loan window for the productive sector, but while the pool is relatively small compared to the demand for credit, the price at 9.95 per cent interest is one of the cheapest deals that a commercial bank has directly placed on the table.
Scotia Group Jamaica President Bruce Bowen, who launched the fund Monday, said the money was intended to stimulate production through the creation of new and expansion of existing businesses.
Bank of Jamaica's last report put commercial weighted loan rates at 12.9 per cent in July, approximately 10 basis points below June's 13.06 per cent.
Omar Azan, president of the Jamaica Manufacturers' Association (JMA), immediately said other bankers should mirror Scotiabank's initiative to address what he said was a "chronic" problem of access to affordable capital.
"We encourage bankers to take a more proactive role in the running of businesses and leave their offices to examine operations, instead of just looking at the audited financial statements," said Azan.
Just last Thursday at the JMA's 41st annual awards and banquet, Azan was pushing for Government to devise a policy that would force the banks - perhaps through penalties from a monitoring he later suggested to Wednesday Business - to adjust rates more in line with the signals coming from the Bank of Jamaica, whose benchmark rate is now down to 17 per cent after five rate cuts since July.
He now says the new Scotiabank facility should be a "trendsetter" for the banking fraternity.
The Scotiabank loans, which will be disbursed in Jamaican currency, must be fully collateralised. Repayment is in seven years, which includes a moratorium of up to two years on the principal.
Access to the non-revolving facility, which is financed solely from its own internal resources, is conditional on Scotiabank becoming the borrower's lead bank.
Older businesses
The greater portion of the fund, $425 million, will be dedicated to the older businesses which want to expand and improve production, while the other $75 million is accessible by businesses under two years old.
The bank has also signalled that it will only lend up to 70 per cent of the project funds, saying that borrowers must show that they can finance the other 30 per cent.
All applicants must present a business plan, cash flow projections and documented "information to support the viability of their projects".
Scotiabank is leader in the Jamaican loan market with a loan portfolio of $83 billion at mid-year, in a sector whose gross loans top $259 billion.
Loans issued to manufacturing entities alone for the first half of calendar 2009 hit $9.4 billion (June 2008: $9b), according to the central bank, which reports on the supply of credit.
Agriculture loans grew even more strongly to $4.65 billion, compared to last year's $3.14 billion at half year.
Producers have until June 2010 to apply for Scotia's funds, and must draw down the loans within a maximum 10 months of approval.
Companies under two years old can borrow a minimum of $2 million and a maximum of $5 million - to be called a Smart Start SME Loan - and businesses in the agricultural sector can borrow up to $2 million for planting and resuscitation of crops.
Businesses with established operations will be allowed loans of $5 million to $40 million for the acquisition of new capital equipment, retooling and working capital.
Patsy Latchman-Atterburty, vice-president of the bank's small and medium enterprises division, said at the launch that BNS would continue a programme of training in record keeping to ensure good management among its borrowing clients.
Bowen says existing BNS clients may use 50 per cent of the loan amount allocated to refinance higher cost debt, but for non-clients such refinancing is limited to 25 per cent.
A one per cent upfront commitment fee and other transaction charges, as per the bank's schedule of rates, will apply to the loan.
Speaking to the timing of the loan facility, Bowen said it coincided with signs of a reversal of the recession in major industrial countries.
"If in fact we have now reached the bottom, it is time for the productive sector to lead the way forward," he said, adding that the Jamaican Government had no major stimulus initiatives in place, leaving the role of leadership to the private sector.
Azan not satisfied
But Azan is not entirely satisfied that the banks are leading.
Last Thursday, when he last raised the issue at the JMA banquet in Kingston, only two banks had cut rates. Scotiabank dropped a point off its base rate in August to 20.25 per cent and FirstCaribbean Jamaica later cut 1.5 points off its rate, similarly leaving it at 20.25.
Since then, RBTT also announced it would adjust rates on November 1, bringing its prime rate to 20.5 per cent.
The JMA president believes those adjustments do not go far enough.
"If manufacturers are to be competitive with their regional and international counterparts and are to retool, interest rates must be reduced to single digits," he insisted.
Called for comment, the Jamaica Bankers' Association issued its standard response - that interest rate policy and transaction fees are the purview of individual banks, but added that its members were likely to react appropriately to the central bank's signals on rates.
"In light of the recent reductions in interest rates by the Bank of Jamaica, it is likely that each bank will review its pricing policies and make the appropriate determination," said the JBA via email.
"However, it is also important to note that the cost of credit provided by banks is priced according to the risk presented by varying situational factors, including creditworthiness of customers and ability to repay."
Azan said some companies are cautious about borrowing in the current economic climate but others have been calling the JMA offices daily about where cheaper money could be found.
He advised businesses considering applying for the new Scotiabank loan to approach the Jamaica Business Development Corporation, the JMA, and similar organisations for assistance in meeting the bank's loan requirements.
- Avia Colllinder and Dionne Rose