Address by Mr

I am delighted to address you this morning on the occasion of this Seminar on Structured Finance organised by Barclays Bank, Mauritius. As far as I am aware, this is the first time a Seminar on Structured Finance is being held in Mauritius. This is rightly the time for a Seminar on such a topic as the availability of medium and long-term finance on acceptable terms and conditions on the local market has become scarce at a time when it is most needed.

In the past few years much has been said about the lack of bank finance that could possibly step up the pace of economic activities in Mauritius. It has even been argued that the economy has been and still is going through a phase of some form of credit crunch. Credit crunch is commonly construed to mean a persistent condition whereby demand for credit outstrips by far the capacity of banks and non-bank financial institutions to lend. I have to say that this is not exactly the phenomenon that we currently face in Mauritius. What we are actually faced with is a situation whereby demand for credit outstrips not so much the capacity but the willingness of the banks to lend. Credit crunches occur in varying degrees for several reasons. Let me enumerate three of them:

· banks may run short of loanable funds and are therefore not in a position to extend credit.

· banks may be concerned about growth prospects for certain industries or economic sectors and are therefore not willing to take undue credit risk, and

· changes in regulatory or supervisory practices relating to bank lending standards or measures of capital adequacy could have impacted on credit availability.

These three factors seem to have affected the willingness of our banks to lend. I believe this is rightly an occasion for me to offer a cursory review of the broad sweep of developments that have contributed to the present state of our credit market. The devil is in the details.

It is true that the sale of Treasury bills over the counter by the Bank of Mauritius reduces the ability of banks to lend. You are aware, as much as I am, that we do not have a market for Government papers. In the absence of such a market and given the rigidities and character of our financial industry, the sale of Treasury bills over-the-counter provides an alternative conduit for conducting open market operations. Otherwise liquidity management is virtually impossible. However, I have to underline that we do have a fairly active repo market that does provide liquidity to banks at below deposit rates. The sale of bills by the Bank of Mauritius need not be viewed as an attempt to unduly undermine the lending capacity of banks. With the first step being undertaken with the co-operation of all the stakeholders in the very near future to develop a market for Government papers, the current approach to liquidity management will be shelved.

In the 1980s, our economy went through a long period of expansion - indeed the longest expansion in its history. Led by the euphoria of good times some financial institutions relaxed their credit standards. Credit for real estate projects, consumption expenditure as well as for other ventures was readily available. Banks extended loans to book profits from relatively high rates of interest. Bank credit to the private sector grew at an annual rate of as high as 24 per cent over the period 1985 to 1995. In the euphoria of good times, banks did not assess the degree of risk inherent in the loans. In 1997, the liquid assets ratio that banks were required to maintain was reduced overnight from 20 per cent to zero per cent. However good was the intention of the advocates of this abrupt policy-change the consequences turned out to be unimpressive. Overnight banks found themselves with potentially loanable resources to the tune of Rs 6 billion. Another festive round of lending started. Competing banks further relaxed their lending standards – this time much beyond prudent limits.

By the mid-1990s pessimism regarding the prospects for sustainable high growth rates hardened. Heavily indebted borrowers began to default in large numbers. Bankers had to and still have to tell to borrowers in default that the banking business and theology do not mix. Loan losses increased. Asset quality of banks involved in lending competition deteriorated. Clear and present danger: in a nutshell, this is how I perceived the situation a few years ago. It is commonplace that a decline in the asset quality of banks inevitably undermines their capital positions. The erosion of credit quality has thus adversely affected the willingness of banks to lend.

Quite naturally, banks tightened their credit standards with a view to minimising possible future losses. The restrictive lending standards adopted by banks, in turn, exacerbated the problems of many borrowers and of the already weak firms. The tightening of the availability of credit by banks has taken several forms. The two most apparent ones are, firstly, the imposition of more restrictive terms and conditions under which fresh loans are made and existing loans are rolled-over and, secondly, banks refraining from making new loans as well as from renewing loans except for the creditworthy borrowers.

Quite importantly, there has also been one more factor that has affected the willingness of our banks to lend and that is our strong re-assertion in recent years of the importance of the soundness of our financial industry. In fact, there has been no significant change in the supervisory policies of the Bank of Mauritius. However, existing standards and their application by our bank supervisors have become more stringent than before – and are very likely to become more so in the years ahead.

The string of credit developments and defaults in the recent past serve as a forceful reminder of just how much the banking system has to digest and of the problems they have been posing to the authorities’ efforts to boost our development process. It is against this background of considerations that the Bank of Mauritius decided to provide the bridging finance for the restructuring of the sugar industry and some other facilities to firms in the Export Processing Zone.

There are lessons to be drawn from the experience of relaxed credit standards that prevailed in good times. Obviously, those in our banking industry who were quick to learn the lesson have reviewed their lending operations. Credit crunch is curable. It can be also avoided by adhering to stable monetary policy and sound lending principles as well as by lenders adopting a constructive approach to resolving the problems of their customers. Good credit risk management, credit discipline and a concern for quality credit are now - and indeed should be - an overriding consideration in the lending decisions of banks.

I mentioned at the beginning of my address that this Seminar is being held at an opportune time. The late 1990s marked the end of something and the beginning of something else. That something else is the increasing awareness of the urgent need to promote micro and macro-economic efficiency in the real sector of the economy as well as in the area of finance. That something else is also the authorities’ decisiveness with regard to structural reforms, commitment to go for big projects in the public sector and private sector initiatives in the region the financing of which requires funds that is not necessarily available in Mauritius.

Traditionally, banks in Mauritius have focused mostly on trade financing and on the provision of working capital funds. There is now a growing need for a much wider range of not only financial services but also of financial institutions whose object is to address and meet the needs of their clients. The goal of such financial institutions need not be the creation of new products but to create real value for their clients. What we need in Mauritius are financial institutions that listen to our entrepreneurs, institutions that know the businesses of their clients and help them execute strategies that are good for them. Enterprises or any other organisation, be they in the public sector or the private sector, seeking a valuation of the best financing option or seeking financing expert to arrange the best new credit facilities available or to restructure existing lines of credit and entrepreneurs willing to purchase business units but being turned down by banks are very likely to benefit from this Seminar. . May I however say that our entrepreneurs are not that unfamiliar to merchant banking. The financing of Belle Vue Harel Power Plant, purchase of aircrafts by our national airline and privatisation of the Airport of Mauritius are illustrative of their familiarity.

I am aware Mr. Jacques de Navacelle has been quite involved in this type of financing of projects in Mauritius and I would like to seize this opportunity to express my appreciation for the initiatives that he has taken ever since he has been heading Barclays Bank, Mauritius.

May I wish success to Mr. Jonathan Berman, the first Managing Director of Merchant Banking Africa and I look forward to Mr Roger Leung Cheung working fruitfully with Mr Berman on projects in Mauritius.

Thank you.