Deposits increase driving the total money supply up

Banking Sector Developments
May 2018

  May 18
Apr 18
Mar 18
Feb 18

Deposit rate (%) *r 
2.062 2.069 2.091 2.085
Lending rate (%) *r
7.904 7.879 7.863 7.852

Total Deposits (T$m) r
596.0 585.5 595.5 591.3
Total Lending (T$m) r
448.2 444.8 443.6 439.5
New Commitments (T$m) r 10.7 18.7 8.7 8.8
Broad Money (T$m) r 561.5 547.1 558.7 558.2

* - Weighted Average calculated as a function of interest rate and volume of deposits and loans.
r - Revised due to inclusion of Government Development Loan data.

Higher deposits by Government and individuals drive the increase in bank deposits of $10.5 million over the month pushing broad money higher.


Total banks’ lending rose over May also adding to the annual balance reaching a new record of $448.2 million. The monthly movement resulted mainly from more loans being extended to businesses whereas the yearly movement stemmed from more loans to both businesses and households. Private sector credit rose by 0.4% over the month and 7.9% over the year.

Lending extended by non-bank financial institutions increased over the month by $2.2 million (1.4%) and over the year by $21.9 million (15.7%) to $161.4 million. The monthly rise continued to be driven by increases in home improvement and small loans as well as household loans to the public as part of Tropical Cyclone (TC) Gita Assistance Packages. The yearly growth again reflected higher home improvement loans, small personal loans, and household loans. This had also offset a decline in Government on-lent loans.

Business Lending

Total banks’ lending to businesses rose over May and over the year. At the end of the month, the business lending balance was at its highest level at $201.5 million. The monthly increase resulted from rises in lending to businesses involved in agriculture, transport, and manufacturing which will contribute to economic activities in these sectors.

Over the year, business lending increased owing to more loans extended to the public enterprises, wholesale and retail, transport, and services sectors. The fisheries and manufacturing sectors also contributed to the annual rise in total business loans. The yearly increase continued to support credit growth and the economic activities in the business sectors. This also assists in fuelling imports for these sectors coinciding with a 48.1% increase in import payments for wholesale and retail goods during the year.

With the inclusion of government on-lent loans, business lending increased annually by $29.6 million (13.3%) reflecting more business loans offsetting repayments of government on-lent loans.

Household Lending

Household loans increased over May and over the year to a new high record of $245.9 million. These respective rises stemmed largely from more housing loans reflecting people rebuilding following Tropical Cyclone Gita, indicative of an active construction sector. However, over May, housing, vehicle, and other personal household loans all increased.

Over the year, only housing loans rose driving the overall rise in household loans offsetting declines in vehicle and other personal loans. The consistent rise in household loans continued to reflect persistent increasing demand of households and rebuilding efforts of the country following TC Gita. Furthermore, this showcases households’ ability and capacity to access loans.

Lending from non-bank financial institutions to households rose over the year by $23.1 million (26.4%) reflecting higher personal loans disbursed throughout the year.

Other Lending

Other loans from banks declined over May and over the year due to a fall in lending to the non-profit institutions sector.

Non-performing loans

Bank’s total non-performing loans decreased over May however, increased over the year. This led total non-performing loans to $19.2 million. The monthly fall was mainly due to a decline in non-performing loans in the construction sector reflecting receipt of insurance claims on property that was affected by TC Gita. The non-performing loans represented 4.2% of total loans in May 2018, a decline from 4.5% last month.


Total bank deposits increased over May and over the year to $596.0 million. The monthly rise resulted mainly from an increase in government deposits (time deposits) and individual deposits (savings deposits) offsetting the decline in deposits by private businesses as they fund overseas payments (demand deposits).

Over the year, total bank deposits increased driven mainly by time deposits which increased due to the increased driven mainly by foreign investments, higher investments of retirement funds and higher deposits from the private sector. Additionally, saving deposits rose stemming from higher deposits by the private sector and churches. Receipt of government’s budget support funds and improved government revenue collection during the year contributed to the overall increase in deposits.

Interest Rate Spread

The weighted average interest rate spread widened over May and over the year to 5.910%. The monthly increase reflected an increase in weighted average lending rate and a decline in weighted average deposit rate. The total volume of loans rising over the month affected the weighted average lending rate whist the decline in the weighted average deposit rate stemmed from the high growth in deposits.

The weighted average interest rate spread rose over the year and reflected the increase in the weighted average lending rate. More specifically, he weighted average lending rate widened resulting from the high volume of loans over the year. The weighted average deposit rate declined driven by high growth in the volume of deposits. Overall, despite the rise in lending interest rates, it remained supportive of both the annual credit and deposits growth.The weighted average interest rate spread widened over April and over the year to 5.810%. The monthly increase reflected an increase in weighted average lending rate and a decline in weighted average deposit rate. The total volume of loans rising over the month affected the weighted average lending rate (particularly for housing and other personal lending rates). Meanwhile, a decline in the demand and savings deposit rates across most commercial banks resulted in the decrease in the weighted average deposit rate.

Broad money

Over May, the net domestic assets solely contributed to the increase in broad money whilst net foreign assets declined. More specifically, net domestic credit led the rise due to higher loans extended to the public enterprises and private sectors coupled with higher government deposits. Foreign reserves declined over May triggering the fall in net foreign assets.

Over the year, broad money increased. This was driven mainly by net foreign assets and had offset a decline in net domestic assets. In particular, foreign reserves significantly increased contributing to the overall increase. Budget support funding received during the year contributed to higher government deposits and the higher foreign reserves and corresponded to the increase in net foreign assets.


Liquidity (reserve money)1 in the banking system increased over May due only to higher currency in circulation. Withdrawals by the commercial banks from the Reserve Bank vault increased coinciding with higher currency in circulation. Events during the month such as Children’s Sunday, Mother’s Day, Father’s Day and the church annual conference explained the high demand by the public for cash. The banks’ total loans to deposit ratio fell slightly to 75.2% from 76.0% last month, reflecting an increase in total deposits outweighing a rise in total loans. This continues to remain below the minimum requirement of 80% which indicates that excess liquidity in the banking system remains and that there is capacity for further lending by the banks.

Over the year, the banking system liquidity increased due to respective increases in required reserves (statutory required deposits) and in currency in circulation. These growths had offset a withdrawal by the commercial banks from the Reserve Bank’s vault. The increase in the statutory required deposits reflects the revision to raise statutory required deposit requirement ratio from 5% to 10% effective in July 2017.


Commercial banks’ prospects for credit growth continued to remain positive. This is supported by the continued increase in new loan commitments over the month. The Reserve Bank’s projection is supported by improving economic conditions, business confidence, and annual (one-off) events taking place throughout the year. Additionally, cyclone packages (post TC Gita) extended by the banks are expected to assist the public with rebuilding and further expected to contribute to the credit growth. The Reserve Bank’s credit growth forecast of 16% in the year to June 2018 is unlikely to be met given delays and cancellation in implementing of projects in which loans were approved for. However, the level of competition between banks in terms of housing loans coupled with the accommodative monetary policy is expected to utilize the excess liquidity in future to encourage lending and support economic activity.

The Reserve Bank will continue to closely monitor the credit growth and broad money movements to ensure financial and macroeconomic stability are maintained and that there is no overheating in the economy.

1 - Liquidity in the banking system (reserve money) is a sum of currency in circulation, exchange settlement account balances, and statutory reserve deposits (SRD).


Economics Department
National Reserve Bank of Tonga

Telephone: (676) 24057
Fax: (676) 24201 

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Banking Sector Development - May 2018
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