Mauritius' banking sector expects excess liquidity to remain a challenge this year due to slack demand for credit, the Indian Ocean island's banking association said on Wednesday.
Ravin Dajee, Chairman of the Mauritius Bankers Association, told Reuters the government's decision to borrow in foreign currencies rather than raising money locally through the issue of more Treasury bills had exacerbated the situation.
"There is a lack of viable projects on the local market at the moment and this has resulted in lower demand for credit from different economic sectors," Dajee said in an interview.
Mauritius' central bank shares the same concerns but blames commercial banks for the high liquidity levels. It accuses the island's risk-averse banks of "lazy banking", parking surplus funds in short term government paper rather than lending to the private sector.
Bank of Mauritius was due this month to start capping commercial banks' holdings of Treasury bills to spur credit growth. The banking sector said the planned move was misguided.
"It is not as simple as that. We need to face the facts that there are not enough big investment projects. We should bear in mind that from a risk management point of view all banks need to keep some liquid assets and these liquid assets are mainly Treasury Bills," Dajee said.
Industry players say the cap has not yet kicked in.
Bank of Mauritius accepted offers on its three-month paper last week for the first time in 10 weeks, fetching a yield of 2.78 percent. In February, the 91-day Treasury bill hit a record low of 1.73 percent.
"It is essential for the whole financial sector, and more particularly for banks, to have instruments of various maturities otherwise this will cause a distortion," Dajee said.
"What do we do if we don't have Treasury bills to place the money? There will be a mismatch as banks will have to take their 91-day deposits and put them in 364-day bills, thus increasing liquidity risk for banks."
Dajee said investment opportunities on the African continent as well as the offshore sector would drive the sector's growth this year.
"We see opportunities for the banking industry at regional level. Africa represents a big potential and many of our banks are gearing up to become service centres for the continent."
The Indian Ocean island's economy is expected to grow by 4.5 percent this year, according to official estimates, higher than a previous forecast of 4.2 percent issued in December. (Editing by Richard Lough and Patrick Graham)