Interest rates charged by banks are too high and therefore a deterrent to lending to small and medium size businesses, Central Bank Governor Josef Bonnici said yesterday.

But Bank of Valletta CEO Charles Borg disagreed with the governor’s views and said loan levels were healthy.

Prof. Bonnici was speaking during a briefing to the financial sector and the media about the CBM’s annual report. He had already brought up the subject of bank lending rates last autumn and he reiterated yesterday that the core banks ­had indeed brought their interest rates down slightly.

But he was clearly not satisfied, and presented a chart showing that the rates in Malta – 5.16 per cent for loans up to €1 million and 3.75 per cent for loans over that amount – were the fourth highest in the eurozone, after Portugal, Cyprus and Slovenia.

The first solution was for local banks, in spite of their high liquidity, to be “creative” and use some of the funds that the European Central Bank was making available at very low rates.

The issue is simple. The banks are resisting change

He pointedly referred a few times to the healthy profits made by the commercial banks, saying that, although they were very positive, “there is the expectation that these will continue to rise and rise no matter what”. BOV made a profit of €115.8 million in 2012/2013, while HSBC Malta made €90 million.

But an indignant Mr Borg took the microphone during the question and answer session to insist that BOV’s lending to SMEs had increased and that the overall figure had only gone down because large loans had been repaid – mostly on time – and not replaced by new ones. He pointed out that the bank had loaned to over 600 SMEs through the Jeremie Scheme and that over 90 per cent of its clients were SMEs.

Mr Borg argued that BOV had taken out funding from the ECB in the past, even though it was more expensive, but that its model was based on deposits from its retail customers, which were more expensive for the bank.

He explained that the situation in Malta was different as SMEs tended to rely more on overdrafts, which were undeniably more expensive. They also started out with a low equity base, which was an endemic problem and one which posed a risk that the banks had to factor in.

“In five years since the crisis, Malta came out in better shape than many other countries and this was only because the major players – including the banks – played their part. It is true that rates are on the high side but we have to understand why,” he said.

Prof. Bonnici was not sympathetic, pointing out that deposit rates were in line with the EU average and it was only the lending rate which was much higher. He also said that, while he appreciated the credit risk involved in SME lending, he could not see why this would be higher than that in other eurozone countries – and certainly not in all sectors.

He ended with a warning: “If the rest of the economy does not grow and thrive, then in the long term this will have an impact on banks and on their profitability.

“We can’t ever be 100 per cent sure whether demand would or would not increase if the rates were lower as the information structure we have does not give us these indications,” he said.

“As policy advisers, we see a problem and the European Commission also saw it and commented in ever stronger terms. The issue is simple. The banks are resisting change.”