Royal Bank of Canada President Nathaniel Beneby is strongly cautioning borrowers to realize the true purpose of the slash in the prime rate -- change that did not translate into more money to burn.
"What this will do is allow those who are struggling to meet their current level of payment to get a reduction and cause their mortgage or loans to become current," he told Guardian Business. "[The reduction] is not enough to go out on a shopping spree or incur other debts.
"This does not mean they automatically have more money to spend because of the reduction in the loan payment and that they feel the recession is over and things have been restored back to normal."
Beneby's comments come as most banks move to pass on the reduced interest rate on loans to customers. The situation could go a long way in helping with the mortgage defaults in the country, coming even as the Mortgage Corporation reveals its delinquencies are running at a 40 percent level.
The Clearing Bank's Association (CBA) recently announced a 75 basis point reduction in the prime rate. Effective June 8th, the prime lending rate fell to 4.75 percent from 5.5 percent. The news follows a policy signal from The Central Bank of The Bahamas that the discount rate was reduced from 5.25 percent to 4.5 percent, effective June 6th.
"Based on the action taken by The Central Bank of The Bahamas on June 6th, 2011 to lower the discount rate from 5.25 percent to 4.50 percent, the Clearing Banks Association hereby advises that effective June 8th, 2011 the prime lending rate will be lowered from the present level of 5.5 percent to 4.75 percent," read a statement released by the CBA earlier.
It means that variable rate loans such as mortgages, overdrafts and commercial loans with terms based on the prime rate will have to be re-priced. Fixed rate loans, which include many consumer loans, do not fluctuate with the prime rate, typically maintaining the same origination rate throughout their lifetimes.
For many Bahamian consumers and businesses, it will make servicing variable rate loans an easier task, as arrears deepen. According to the Central Bank's latest numbers up to March, total private sector loan arrears increased by $20 million [or] 1.7 percent to $1.19 million, with the corresponding ratio of arrears to total loans rising by 0.3 of a percentage point to 19 percent.
The expansion in total loan arrears was led by a 12.9 percent hike in the commercial component, said the bank, to $287.9 million. It came as delinquencies in both the 31-90 days and non-performing segments moved higher by $2.7 million or 3.7 percent and $10.2 million (or) 5.1 percent, respectively.
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