By LK Hewlett
BASSETERRE, St Kitts (WINN) — The high level of non-performing or bad loans continues to be the main risk across banks in the Eastern Caribbean Currency Union.
In a recent episode of the Eastern Caribbean Central Bank’s program, ECCB Connects, Gordon Julien, country manager of Scotia Bank St Kitts and Nevis talked about the challenges customers face with repayment of loans which often lead to delinquency.
“A non-performing loan is a situation where a loan becomes so delinquent to the point where a period of 90 days would have lapsed without payment of principal and interest and collection of that loan is in significant doubt.
So high level of delinquency/sever delinquency suggests that these loans are non-performing or non-accrual. What are some of the issues that cause delinquent loans is poor credit underwriting practices from the get go, so sometimes you don’t have access to all the information, you disregard certain things, there’s an undue reliance on collateral, the absence of a credit bureau, persons overextending themselves.
Sometimes you may have done all things right from the onset but circumstances may change, someone may have lost their job, there’s marital disputes/divorce, you may have situations where unexpected expenses like a medical emergency and those sort of things would cause a loan to become delinquent or non-performing,” Julien said.
The bank manager said in the case of sudden unplanned expenses that may affect a customer’s ability to make regular payments on their loan, there are certain recourses for those situations, including having a conversation with their lender.
“I think that there are certain measures that can be put in place to prevent or mitigate those risks so for example banks utilize what is called a TDSR – a total debt service ratio – whereby you do not allow the repayment of a loan to go beyond 40-45 percent, so that way it creates a sort of buffer it gives you some extra money so that you can buy groceries, do certain things, travel entertainment, so you live within your means.
“Then once you’ve taken a loan a person needs to consider protection, protection in the event of a catastrophe so you have a hurricane that destroys your house, it needs to be repaired that’s an unexpected expense, the insurance will kick in. Health insurance, critical life for critical health in case where you are incapacitated and you can no longer work.
“So those forms of protection would mitigate against persons not being able to pay their loans and fall into that serious situation of delinquency. So when you realize that your income has gone down you proactively go to the bank and try to explore what options are available to you, debt consolidation, for example, would allow you a bit more space in terms of improving your cash flow.
“Once you have entered into an agreement with the bank, that does not stop because you’ve lost your job, because you’ve divorced or you had a medical emergency the expectation of the bank is that you honour your obligation and make that payment,” he explained.
Julien addressed how non-performing loans impact a bank’s bottom line and how that, in turn, affects the delivery of other financial services to customers.
Republished with permission of West Indies News Network