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Organisation of Eastern Caribbean States (OECS)

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Non-performing loans threaten ECCU financial sector
Published on January 17, 2017Email To Friend    Print Version

ECCB headquarters in Basseterre, St Kitts

By LK Hewlett

BASSETERRE, St Kitts (WINN) -- One of the leading threats to the Eastern Caribbean Currency Union (ECCU) financial system is the high level of non-performing loans of banks in the countries that share the EC dollar.

This is according to Timothy Antoine, governor of the Eastern Caribbean Central Bank (ECCB), in a recent media engagement in Dominica:

“Where are we as a region? On financial stability we are stable and somewhat resilient; what’s the goal, strong and resilient, and why are we not there yet, because there are some weaknesses in our financial system including our banking system, which we need to be aware of.

“What do banks do for a living? Take deposits and make loans, that’s the bottom line; they do some other things too but that’s their main business. Right now we are very concerned with the high level of nonperforming loans. At then of 2015 the ECCU was at 17% -- that means of the total loans issued 17% were bad, or nonperforming.

“Now the problem is the international benchmark is 5%. We really should not have bad loans in excess of 5%. It’s very important for us to see that come down for many reasons, including the very issue of growth and job creation.”

“As the banks make less money from loan interest, this results in increased banking fees and charges and decreased lending, especially to the business sector.

“Those bad loans mean the banks are making less money because interest income is down, profitability is down. So what are we seeing? We’re seeing more bank fees and charges and I know you don’t like these fees and charges but that’s a result of that.

We’re also seeing banks not being able to lend as much as they should. In terms of private sector credit we continue to see a decline so even though the economies are growing again, private sector credit is still in decline, and that’s a concern, so we are very keen to see private sector credit expand.”

The Central Bank is recommending, among other resolutions, that national banks amalgamate. He said for such a small economic space and population, the ECCU has too many banks:

“Every time we identify issues in the currency union, we also attempt to identify solutions, recommendations. The first is the establishment of the Eastern Caribbean Asset Management Corporation, that is set up as a company, corporation and the idea is that it would buy bad loans from banks to help reduce the non-performing loans. As the nonperforming loans go down the banks will feel more encouraged, more confident about lending.

“Consolidation of banks: the current environment is very difficult for our indigenous banks. At the moment we have twelve indigenous or national banks, but here’s the issue- we only have a population 630, 000. So when you add the indigenous banks with the foreign or international banks, frankly spoken, there are too many banks in this small space.

“And why do I say that? Because the costs are high; so consolidation would provide a lot of benefits for the people o the region and we are strongly encouraging our indigenous bans to come together.”

A recent IMF working paper looked at the impact non-performing loans in the ECCU is having on the region’s financial sector and economic activity, and determined that non-performing loans are at the core of the ECCU banks’ financial distress.

The IMF paper said the regional financial infrastructure requires further strengthening, noting that the lack of a credit bureau and credit-rating agencies continues to restrain potential lenders from availing themselves of borrower’s financial history.

Republished with permission of West Indies News Network
Reads : 26152

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Louis Bernard:

I am heartened that finally; some attention is been given to the non-performing loan portfolios of these institutions. The sad thing is that it took the verge of collapse to start a conversation about this serious challenge to the financial system of the region.

Way back in 2005, I tried to bring to the attention of the relevant authorities the danger of the high level of non- performing credits, and the failure of the supervisory and regulatory division of the ECCB.

I was ignored (just been polite). What was more disconcerting was that my research during the period late 2002 to 2004 revealed that neither of the indigenous banks had trained Loan Review Officers on staff, there was an absence of policy and/or procedures on Loan Loss provisioning, on the treatment of non-performing loans in the accounting process, the members of these boards lacked the ability to provide direction to management because they lacked the knowledge to request relevant reports that could guide them in their decision making.

Most of them did not even have a credit analyst on staff, so the credit underwriter was also the analyst.

The accounting firms that conducted the mandatory annual audits also lacked knowledge and experience in the way provisioning for impaired loans should be handled.

as in point, at one institution that reported a net profit more than $10 million in one year, included in that figure an amount more than $5.5 million that made up of income on classified loans, of which a sizeable amount was from revenue from credits on non-accrual basis.

From the loan underwriter to the regulator they all must share in the responsibility for this unhealthy situation of the financial system in the region.


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