Thank you for the opportunity to talk with you.  In recent times we have seen a drastic reduction in interest rates especially on mortgages and we have seen quite a number of houses being built and are trying to figure out why there seems to be a boom in building but interest rates are on the decline. The laws of demand and supply would dictate an increase in interest rates because there is a demand for mortgage services.
 

DEON MOSES

(Moses) Well there are a number of factors that determine interest rates. In our society based on demand and supply are not the primary factors.  It is more driven by competition and to a large extent by fiscal policy.  The Eastern Caribbean Central Bank (ECCB) also has a vested interest, and can encourage banks to move in a certain direction.  For example, the first major interest rate reduction that took place probably four to five years ago was on the initiative of the Central Bank. In an attempt to generate economic activity following a downturn, ECCB reduced the mandatory interest rate on savings from 4% to 3% with the specific intention that banks would pass the saving on to the consumer, which they (the banks) did.  I would say that competition among the banks did the rest.

Doesn’t the ECCB intervention have to do with 9:11 and its effects on tourism and so on?

Yes, that would be probably have been one of the factors.  You see, when economies like the United States sneezes, we catch the cold.  During that particular downturn, other factors such as remittances from abroad which account for an injection of in excess of $30 million per annum fell significantly  With that kind of decline in remittances,
ECCB would have been concerned and wanted something to happen in the economy to trigger a rebirth and one of the things they could have done was top “interfere” with the interest rates.

But although the banks are governed by the ECCB how much control does the ECCB have over day to day charges on interest rates?

(Moses) While ECCB regulates commercial banks it cannot dictate the final rates banks charge, but it can exert influence as in the manner I’ve just mentioned.  You see, while ECCB was instrumental in reducing the savings rate, the banks did not have to follow through and drop the rates charged on loans.  However it would have been morally wrong not to have done so.  So in truth and in fact, the ECCB influences to a certain extent what we do through suggestion.

What gave rise to rates being 14 and 15% back then?  How did we get there in the first place, can you explain?

(Moses) I don’t know that if have all the answers. When I joined the bank those were the prevailing rates so I have to guess that it was the prevailing economic conditions at the time. Liquidity would certainly have been a factor.  I remember back then, if a bank had big loans to book it would immediately go out on the market and try to raise deposits just to grant those loans, which meant that liquidity was tight.  One of the things that contributed to liquidity being tight was the level of government borrowing from the local economy.  When government borrows locally, the institution from which it borrowed would draw on its deposits with all the financial institutions.  This had the effect of taking liquidity out of the banking system.

So you’re saying supply and demand.

In that case it would have been supply and demand

But the higher the interest rate the more difficult it is for the average man to get a loan is that correct?

Well the interest rate usually has nothing to do with the person qualifying for the loan.

But the interest charged on what they borrowings would determine their repayment rate.

I think that is where you’re heading.  That is, that the repayment may be more onerous, but in terms of the criteria, it is largely your ability to service the debt.

What effect does interest rates have on one’s ability to service a loan?

 

NADIA FRANCIS-SANDY

(Sandy) The rate itself does not affect whether or not one can qualify for a loan. It would probably be more correct to say that the lower the interest rate, the more likely it would be that one person would be to service more than one loan at a time.  

That I understand, but what has been the response of the consuming public to the sharp decline in interest rates, are you seeing more persons coming forward, are more people borrowing, are more people building?

(Moses) Yes, but it is difficult to state categorically that the response is specifically to the interest rate because remember simultaneously other things happened in the economy.  For example, we had Hurricane Ivan and so people had to rebuild, refurnish and repurchase appliances.  So it hard to isolate it and say it is because of the interest rates are going down.

Well here is what I want you to do for me. Put in perspective some of the factors that would lend themselves to this construction boom that we are seeing. I know Ivan and the rebuilding is one of it. A lower interest rate would definitely help.

(Moses) Definitely

What else can we attribute the increase that we are seeing?

(Moses)  I don’t want to down play the importance of the interest rate drop because of course that will be important, but there’s a legacy that’s been handed down to us from our fore parents.  That legacy is pride in home ownership.  I think that legacy started in the days of Sir Eric Matthew Gairy (first Prime Minister of Grenada, 1974-1979).  I believe he was know to have said, and to have inculcated in our men folk, that real men provide homes for their family. So historically we’ve always been strong on wanting to own homes.  Another factor is that we have a young population and growing population, so there’s a strong demand for housing. We also have this large number of Grenadians residing abroad, most of whom I dare say have done well and are building homes here with the aim of returning home at some point in time.  Yet another phenomenon is that of returning nationals who had migrated in the 40’s, 50’s, and 60’s and are constructing their retirement homes. So I see it as a three-pronged approach.

In Grenada we have a situation where we have nice homes and very limited disposable cash. How do you explain that?

(Moses) Well it goes back to our pride in home ownership. You would fine that if you compare us with other islands for example the default rate on mortgages would be substantially less here in Grenada because people don’t want to default on their mortgage and risk losing their home.  Owning a home is so important that if a family had to sacrifice something else, like having a smaller disposable income they would do it.

One of the things I forgot to mention which is particularly relevant to the south, is the construction of apartment buildings specifically catering to the needs of students of St. George’s University as a result of the growth in the university population. We can’t discount that factor.

(Sandy) To go back on the issue of disposable income, one would find that in North America for example versus Grenada, the sheer robustness of those economies supports families there having larger disposable incomes than Grenadian families.  Finding a second job is relatively easy there.  Many persons would in fact have a regular 9 to 5 job, and yet another in the night, sometimes vastly unrelated to their regular job, and as such has larger disposable income.  Here in Grenada, most have one job, because by and large sustainable economic activity boils down to a trickle at night.  The extent to which Grenadians engage in other income generating activities such as backyard farming, is not predicated on it brings in, but rather on subsidizing the income from their regular jobs.  Of course, that which is produced in excess of the family’s needs is sold. 

 
On the question of defaulting on loans what is the situation like, based on your knowledge within the industry with mortgage specifically?  

I don’t know the overall statistics for the individual banks but I would estimate that it would be under 5% overall.

What has been the response of the consumer to prevailing interest rates, do you think people are coming forward now?

(Sandy) Well there is certainly a lot of inquiry, that’s for sure.
 
But are persons aware from your point of view that rates have really fallen?

Yes, for sure. Grenada is a very small society. People talk among themselves about the terms and conditions of their loans, and often use it as a bargaining tool.  Additionally advertisements now tend to be more transparent for want of a better word, as it relates to rates, and would often quote “rates starting as low as”.  So the public is aware that rates have fallen.

How much longer can interest stay this low from your point of view?

(Moses) My response would be that it is not something that could be easily gauged simply because anything that happens that would take liquidity out of the system would cause an interest rate rise.  Once the cost of funds to the banks increases that cost would be passed on to the consumer.

But how does RBTT interest rate on mortgages compare to those of the non- financial institutions such as credit unions, insurance companies which are building and the NIS do you find it harder to compete with them are you becoming more aggressive, more innovative with your packages. Do you see yourself under some sort of duress with the way they are making monies available especially the credit unions?

Competition is always good.

Whiles competition may be good to the consumer it may not necessarily be good to your balance sheet isn’t that correct to say?

Not only to the consumer. Competition benefits everybody. It makes the system that much more efficient and so you have to conduct business with competition in mind, especially since the cost of funds of the banks is different from the non traditional lenders. But I’d agree with you when you say the benefits are more to the consumer.
You brought up the question of innovation.  Yes we have had to become more innovative in order to survive in this increasingly competitive environment.

In other words the days of armchair banking are over, when you had a 14% interest rate and a man has to come and labor with you to get a mortgage these days are over because he can now go to the credit union or the insurance companies or NIS and they will listen to him.

Those days are over, long gone. As a matter of fact banks have to consistently review who their competitors really are. For example, some of the commercial houses in Grenada are our competitors, because some of them offer fixed deposit to their customers like we do, some offer hire purchase on cars for example and we give vehicle loans.  So the competition is increasing.

So banks are basically under attack quote unquote?

Yes we are from just about everywhere and every one who has money to lend to consumers.

And how do you survive in this shark infested environment?

You gave me the answer. By being innovative and by being able to deliver a good service at the lowest possible cost.

So you are now swimming with sharks?

I’m glad you put it that way. We’re swimming with sharks we are not the sharks.
Is now a good time to take out a mortgage at the RBTT if yes, explain to me why.

(Sandy) Yes now is a good time for mortgage financing at RBTT and one of the reasons is our attractive rates. We have become more innovative in the way we package our mortgages, and would finance up to 93%, and our mortgage terms are generally longer.  We also offer home equity loans.  So our mortgage product is better now than what we traditionally offered.  Traditionally we mortgage terms was a standard 15 or 20 years, we would have financed a smaller percentage of the cost of the project, and we did not offer home equity loans.   Our service is also unsurpassed in terms of professionalism and response time, and it doesn’t end there.  We are constantly reviewing our processes with the view to offering better service.  So yes, it’s a good time to take out a mortgage at RBTT Bank.

I know you’ve thrown in free legal fees, no service charge.

(Sandy) That was a specific promotion with time lines, but the public can expect other attractive offerings in the future.

(Moses) Those are generally done with special promotions not the regular everyday service because those come at significant cost.

What is the interest rate like now?

(Sandy) Residential mortgage rates start from as low as 7.5%.

Is there a particular figure you have to start at to attract that rate? $500.000 or $1 million?

(Moses) There are so many factors that affect what rate is charged to a particular client.
Generally rates reflect the risk so if a loan is considered high risk, it would probably not attract the best rate.  The lower the perceived risk, generally the lower the interest rate.

Somebody said when banks compete the consumer wins is that correct?

Absolutely

Is there sharp competition among local banks for market share and if so are we likely to see rates becoming lower and lower or would inflation send the rates back up?

While competition would generally tend to drive rates down there really is a ceiling under which it would not make sense to compete. As previously mentioned too you always have to be reviewing the cost of funds, and secondly anything that happens in the economy that takes the liquidity out of the system would result in an increase in interest rates.

But at this period we are seeing a rise in the cost of goods and services. People are using food for bio-fuel now and so food supply is becoming more expensive because droughts and so too are making them harder to get and the little that we get it’s at an increased price not to mention oil and its effect on the economy. The question is with this increase in inflation will we see in the very near future an increase in interest rates?

The inflation rate in the economy generally would not be one of the parameters that would directly influence or drive mortgage rates. An increase in the mortgage rate on the other hand would definitely impact the inflation rate. So while interest rates could affect the inflation rate, inflation really does not impact mortgage rate that much.

How about rates on short term loans and credit cards where are they now and where do you expect them to go in the next couple of months?

I think we should handle them separately because a short term loan when we think about it is to a good commercial customer who could attract a good rate. On the other hand a credit cards are really revolving consumer loans, and are generally unsecured, and so the risk associated with credit cards is high. Additionally the default rates on credit card is generally high, and as such interest rates on credit cards are to cover all the losses that can likely occur.

What effect is the slumping US housing market having on your operations, are you seeing more persons unable to meet their commitments to RBTT?

Well we are not seeing it as yet but once there is a slump in the economy up there we are going to feel it, especially since remittances from abroad make up a significant portion of our GDP.  

Finally put in perspective for me the future of the mortgage industry and where you see interest rates going in the next year or so.

(Sandy) Well certainly mortgage rates are the best that they have been for years. But as we said earlier, it is hard to gauge how much longer it may be sustained as it is.  Again, it’s about liquidity.  

What is the policy of RBTT now are you going aggressively among the noise and the haste to try to rake in as much as you can, is that the mission now?

(Moses) Our mission has never changed. Is providing excellent customer service and providing for the customers’ needs, that’s what we do.

How about commercial mortgages?

The guidelines are quite different from residential mortgages.  That would have to be the subject of another interview.