Bougainville causes

major readjustment

THE banking sector in Papua New Guinea has been hit by the after math of the Bougainville crisis.

Even before the Namaliu government brought down its January mini-budget which froze credit levels, the country’s central agency, the Bank of Papua New Guinea, had ordered a huge reduction in loans from commercial banks and fi nance companies to all sectors except mining. As it is, most mining loans are raised outside Papua New Guinea.

Apart from finance to mining com panies, the banks and finance companies will be allowed to lend up to K 30,000 as mortgage finance for owner-occupied properties, finance for agricultural com modity boards, up to K 30,000 to nationally-owned businesses, loans to pa rents for genuine school fee payments and a maximum K2OOO by way of per sonal loans. New credit will also be allowed as other loans are repaid.

While announcing the policy, central bank governor Sir Henry Toßoburt

forecast a difficult three years ahead.

The zero lending growth rate now set compares with credit growth of more than eight per cent in 1989, with a total of KlOO million being lent. By contrast, expectations are that only K 35 million will be loaned this year to the selected areas exempted by the government from its credit freeze policy.

The overall growth of the non-mining private sector last year was 4.7 per cent.

Sir Henry said this imbalance in the amount of cash loaned out and the rate of business conducted had the effect of putting upward pressure on prices. The government wants to curtail speculative investment, such as real estate dealings and importing of luxury goods.

Westpac-PNG Ltd’s managing director Neil Kinney was reported as saying the new policy would make life difficult. “It will force some hard decisions on both the bank, its customers,” he said.

The controls will certainly make it hard for the banks to continue their re

cent increases in profit results [see box].

The Papua New Guinea Banking Cor poration has also been putting runs on the board. In the year to December 31, 1988, it reported a 15 per cent profit rise over the preceding year. Both these banks have strong ties to Australia, as does the Bank of South Pacific through its National Australia Bank parent. The key to their entrenched position is their deep involvement in trade and finance links to Sydney and Melbourne, and this makes it hard for newcomers to break in as Indosuez Niugini Bank and Niugi

ni-Lloyd International Bank found out.

Meanwhile, the Bank of Papua New Guinea is taking action to clean up the savings and loan movement in the coun try. It plans to liquidate 90 inoperative societies.

These societies, which operate along the lines of credit unions, have often found themselves in financial trouble; the trend to lend money for consump tion (school fees or household appliances for example) has been increasing. But lax control meant that some loans were made without a full check as to whether

the people could afford to repay them.

Some loans were made without proper records being kept. Administrative ex penses for wages, staff benefits and other operational needs sometimes ex ceeded income so some officials dip ped into members’ savings to make up the shortfall.

At the end of June 1989, there were 123 savings and loan associations still registered, with a total membership of 114,000. Only 33 of these are active, the remaining 90 being the dormant ones the central bank will now wind up.

Since the bank issued stricter guide lines in mid-1988, the active societies have managed cost reductions which has improved their financial performance. □