Another first for the PNG banking industry that changes expectations for local competitors
Kina Bank setting international standards: Competition boost
Kina Bank is resetting its Indicator Rate for lending to business in a move that reflects international standards and will drive competition in banking in Papua New Guinea (PNG).
In a bold move the bank will reduce its Indicator Lending Rate (ILR), effective 1 June 2021, to 6.25%.
The ILR in PNG is the predominant reference rate offered by banks on loans to businesses.
It’s set by banks at around 11% and is the starting point for banks to price loans to borrowers. From the starting point a customer’s rate is determined, depending on factors such as security held, credit history or the financial covenants of a loan.
“The approach is not systematic and is unusual in the use of negative data for setting rates on loans,” Kina Bank CEO, Mr Pawson said.
“The ILR is set to reflect cost of funds and doing business for a bank and a customer’s business loan rate will reflect those aspects as well as the financial strength of a customer. Kina Bank is taking the guess work out of this pricing and making things more transparent for a borrower.”
Mr Pawson said there had been no systematic review of the ILR setting and process in PNG meaning banks had not been applying international best practice.
“We’re changing that and in doing so will send a message to the market and thereby increase competition and benefits for customers,” he said.
“We believe ours is a more open approach that introduces greater understanding for customers. It is more in line with how rates are set in offshore banking markets and is intuitively appealing.”
After a thorough review, Kina Bank is re-structuring its ILR to modernise it and bring it into line with international norms and practice, making it the lowest ILR in PNG. The new indicator lending rate will be reduced to 6.25%.
Mr Pawson explained that this did not mean a customer’s borrowing rate would necessarily change. However, a customer will be better placed to judge the rate they are offered in terms of risk – allowing more meaningful discussion and understanding of how the loan rate is set. This in turn will provide greater understanding and transparency as to how a borrower, by modifying their business settings, may impact their borrowing costs based on the bank’s risk and other measures.
“It gives customers more transparency and understanding on loan costs, how they are arrived at and therefore more control over their finances and the choices they make. We believe all banks should offer this,” Mr Pawson said.
The new ILR will provide a starting point for the determination of a loan rate that will apply to any individual customer; based on an assessment of the customer’s risk profile, financial strength, security offered and a range of other factors. In most cases, a risk margin is added when setting rates on individual loans based on these factors.
The Kina Bank Business ILR is unambiguous, boldly competitive and in line with how business customer loan rates are set internationally.
“The effect of changing our pricing policy means rates accurately reflect the cost of lending. We are properly linking it to the overall cost of lending so that borrowers have greater clarity of how their business is assessed and in particular for risk,” Mr Pawson added