Money Talk… Non-performing loans and the decline of lending by banks

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Loans are a necessary risk in the financial world. Companies need it to grow their businesses; and the average man, to build his dream home. Banks, on the other hand, need companies or individuals to take the loans that they are offering. The bank gets to benefit by making you, the borrower, pay an interest rate.

When banks give out loans, they are engaging in a game of risk. There is never a hundred percent guarantee that the loans will be repaid as agreed. There are a number of things which could prevent a borrower from honouring his payment plan, such as the loss of employment or an accident.

In this regard, the bank gives the borrower a period of time to service the loan. In a case where no payment is made and all avenues fail to retrieve the money, the bank has no choice but to classify the loan as a “bad debt.” This is also called a non-performing loan.

Banks are expected to keep a watchful eye on non-performing loans. Failure to do this can have a serious domino effect on the society and the economy at large.

Banks usually have a certain amount of money stashed away to clear “bad debts.” But when non-performing loans are at a high and that “emergency fund” to write off those debts gets to its minimum, then it affects the bank’s ability to provide new and upcoming businesses with new loans.

This can have an effect on the housing sector, the construction sector, the agricultural sector, the mining industry, etc.

The scenario described above essentially sums up the situation that has been taking place in Guyana over the last few years. Non-performing loans in various sectors have been rising at worrying rates. And the banking sector, to protect itself, is not so keen on lending as it used to.

It is at this point that we shall dive head on into the hardcore statistics which were provided to the Guyana Inc. Magazine by Central Bank. The Bank of Guyana is also the manager of loans which forms part of the micro-prudential regulations.

 

REVIEWING 2016

 

According to Central Bank, the level of non-performing loans deteriorated by a further 17.1 percent following the 41.5 percent rise at the end of December 2015.

The deterioration was attributed to five Licensed Depository Financial Institutions (LDFIs). Non-performing loans represented 11.5 percent of total loans, 1.4 percentage points above the end of December 2015. Total loans grew by 2.0 percent over the comparative period to G$262,526 Million, with five LDFIs recording increases ranging 1.6 percent to 13.3 percent.

Five of the eight LDFIs recorded increases in the level of their non-performing loans, taking the aggregate non-performing loans 17.1 percent (G$4,412 Million) above the G$25,874 Million reported at the end of December 2015. The three remaining LDFIs’ loan portfolios improved with their non-performing loans declining within the range of 1.9 percent to 8.3 percent. The 17.1 percent rise in the overall level of non-performing loans was due mainly to a 12.2 percent (G$2,412 Million) increase in non-performing loans in the business enterprises sector.

 

SECTORAL NON-PERFORMING LOANS

 

On a sectoral basis, non-performing loans expanded in both the business enterprises and households sectors by a respective 12.2 percent and 32.9 percent when compared with 2015. The increases in the services and manufacturing sub-sectors of 33.7 percent and 7.8 percent respectively were responsible for the overall increase in the business enterprises non-performing loans.

The sub-sectors with the highest concentrations of non-performing loans were the construction and engineering sub-sectors, accounting for 75.6 percent of the manufacturing sector; and the distribution sub-sector (wholesale and retail trade) accounting for 43.5 percent of the services sub-sector. The housing sub-sector (including purchase of land and real estate) accounted for 65.8 percent of the households sector.

Provision for loan losses

The ratio of provision for loan losses to non-performing loans at the end of December 2016 was 44.6 percent, up from 37.7 percent at the end of December 2015.

Risk Assessment

The overall assessment of the banks’ credit risk remained high and increasing as the ratio of non-performing loans to total loans rose to 12.9 percent, up from 11.5 percent at the end of December 2015. Poor credit administration and inadequate credit risk management were the main contributors to this rating. Three banks were rated as high and increasing due to the growing levels of non-performing loans.

Loan Concentration

Loan concentration among large borrowers deepened with exposure to the industry’s top twenty borrowers as at December 31, 2016 of G$58,578 Million, reflecting a 4.3 percent (G$2,392 Million) expansion above the level at the end of December 2015. Four LDFIs recorded increases ranging from 1.0 percent to 23.9 percent in their respective exposures, while the remaining four LDFIs had respective decreases ranging from 5.1 percent to 15.0 percent. The ratio of the industry’s top twenty borrowers to total exposure was 14.6 percent, 10 basis points above the end of December 2015 level.

Loans to Related Parties

Loans to related parties of G$9,127 Million as at December 2016 were 10.7 percent below the end of December 2015 level, following a 14.5 percent increase from the previous year. The ratio of related parties’ loans to total loans was 3.5 percent, 50 basis points below the previous year. Loans to related parties remained concentrated in the ‘other related persons’ category, which accounted for 81.3 percent of the aggregate loans to related parties, 4.4 percentage points below the end of December 2015.

 

2017 PERFORMANCE

 

Lending by banks continued to be hampered due to a high level of non-performing loans in the system for 2017. This is according to the Finance Ministry’s half year report.

The document says that commercial banks remained well-capitalized in the first half of 2017 with a capital adequacy ratio of 26.6 in June 2017, compared to a ratio of 25.8 in June 2016.

However, non-performing loans increased from 11.9 percent in June 2016 to 13.1 percent in June 2017, with 61 percent of this increase concentrated among business enterprises.

Additionally, commercial banks small savings and lending rates reduced in the first half of 2017. The small savings rate was recorded at 1.18 percent in June 2017 compared to 1.26 in June 2016, while the weighted average lending rate was 10.34 percent, compared to 10.46 percent in June 2016.

Additionally, growth in mortgage lending increased, on average, by 4.5 percent, comparing the first half of 2017 to the same period in 2016.

Lending also grew, on average, by 7.4 percent in the services sector during the first six months in 2017, compared to the corresponding period in 2016. But these gains were offset by reductions in lending in the agriculture, manufacturing and mining and quarrying sectors.

Notwithstanding the high liquidity in the banking system, the Finance Ministry said that the high level of non-performing loans, combined with apparent risk aversion, continues to hamper bank lending.

On a sectoral basis, non-performing loans in the business enterprises and households sectors expanded by 9.1 percent and 24 percent respectively when compared with the first half of 2016. Two sub-sectors services and manufacturing, within the business enterprises sector recorded increases in their respective levels of 23.3 percent and 17 percent over the end of June 2016 levels.

 

Statistics provided by Central Bank

Article Categories:
Columns · Finance · Issue 29 · Money Talk · Publication

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