Ram questions state of affairs at NBS

Nov 07, 2009 News

Official: We cannot break regulations by issuing more mortgages

As Government announces tax rebates that will allow commercial banks to lend up to $8M, a leading accountant has raised several questions about the New Building Society.
On Thursday, President Bharrat Jagdeo announced that NBS has reached its limit and can no longer handle the demand of mortgages.
In a strongly worded response to this, yesterday, accountant Christopher Ram, who in recent times has been a harsh critic of the operations at NBS, said that the President’s statements were astounding, in light of that fact the entity only “ten months ago had more than $10 billion in highly liquid Treasury Bills alone.”

Huge Expenditures
Acknowledging that lending is a revolving activity, the accountant said that where the loan portfolio is expanding as it is with NBS, the outflow from cash lent will far exceed the cash inflow from repayments.
“Remember as well, that loans are not the only transaction that consumes funds in the NBS.
The near billion-dollar head office under construction and the attempt by the NBS to bail out CLICO with the purchase of $1.5 billion in shares in the Berbice River Bridge from which only annual interest is received can easily create a liquidity problem.
“The President’s remarks about the NBS suggest that that is the case.”
Worse yet, Ram said, if depositors lose confidence in the safety of their money in the NBS, they will start withdrawing their money which can lead to a run on the institution. “That is the worst possible scenario which the President’s ill-phrased and irresponsible announcement can trigger. The President’s message is that the NBS will lose the competitive advantage it had over commercial banks. This will inevitably affect the NBS financial performance in future periods.”
The accountant, who at one time sat on the NBS board, noted that it is coincidental that the Chairman of the NBS, Dr Nanda Gopaul, is a top Office of the President man.
According to Ram, NBS is being “terribly managed with a totally political board and a staff that are intimidated and de-motivated.”
The accountant lashed out at the Bank of Guyana, as a regulatory body for financial institutions, for “obstinately refused to bring the NBS under the Financial Institutions Act which means that the NBS is unregulated and is not required to set aside a reserve with the Bank of Guyana.”
That means that there is no form of insurance; depositors funds are totally exposed, Ram claimed.
“Concerned members have asked the Society for half-year information but true to form there has been no response.
The President’s comments suggest that he has information which the Society is not sharing with its members, adding to uncertainty and possibly fear.”

NBS response
Yesterday, a senior NBS official explained that under its regulations, the society is not allowed to issue more than 66 per cent of its total deposits to mortgages.
With the huge demand for mortgages in recent years because of new housing schemes, among other factors, NBS has almost reached that 66 per cent limit.
The society is still accepting mortgage applications but approvals are taking some time.
Explaining, the official said that repayments are coming in but not fast enough to cater for the huge demand.
In addition, several applicants have been issued with approval letters but many have not visited NBS to complete the mortgages process.
“So what we have is a number of approvals and we have to cater for that.”
According to the official, NBS is one of the most stable of institutions in Guyana with almost $15B in assets.
NBS just cannot break its regulations and go above the 66 per cent, the official said.
The society is expected to make a statement in coming days, Kaieteur News has been told.
President Jagdeo, on Thursday said that for some time now, the administration has been pushing for an expansion of credit to the housing sector.
“As you are aware, for some time now, I have announced an enhanced focus on housing… that we plan to spend some $6B over the next few years to enhance infrastructure to develop 20,000 house lots so that the demands that we have could substantially be reduced.”
Explaining, the Head of State said that the facility of $2B will target single parents and senior citizens who for one reason or the other are unable to meet criterion of either the NBS or commercial banks.
With a huge demand for home financing, NBS has reached its limits, the President said. It just cannot continue to service the great demands out there.
NBS had enjoyed tax benefits that waived taxes on interest earned from the lent money. Government, sometime ago, had allowed commercial banks also to lend up to $3M in home mortgages with the same benefits.
“…So if the banks will not have to pay tax on income earned on loans, they can afford to lower the interest rates which many have done, particularly Republic Bank and Citizens (Bank),” Jagdeo explained.
He urged the commercial banks, which will now be benefiting from the increased limit of $8M, to be aggressive. “…and they have agreed that it is good business for their sector. So many people can now go into the commercial banking sector and borrow $8M and get an interest rate close to that of NBS.”
The President said that he hoped intervention will represent a huge boost to the housing sector.

$2B fund
Meanwhile, Christopher Ram, who is a partner in the accounting firm of Ram and McRae, also raised questions on a $2B housing fund from Government that will target senior folks and single parents, among other vulnerable groups.
“The President’s comments are no more helpful and raise more questions than answers. If this money is set aside from the Treasury it will aggravate an already bad deficit situation. What guidance was provided by the Guyana Revenue Authority and the Minister of Finance in respect of the impact of the programme on the deficit?”
Questioning how the country could continue to sustain deficits created by this “type of ad-hoc spending policy”. Ram also asked if “the President is aware that a national lending policy whose main attraction is populist, is what led to the mortgage and real estate crisis in the US?
“Is he aware that even at eight per cent per annum, an $8 million loan repayable over 15 years will require a monthly repayment of $76,000?”
He also questioned who will administer the fund, “… Is the Government going into lending? If the Government contracts this to the commercial banks, who bears the loss on individual loans?
What will be the criteria for eligibility and does everyone get the same loan amount?”
Ram wondered whether the programme was properly thought out or intended as a distraction from other issues that have placed the government under a very unfavourable microscope.
“Is the statement intended to send a message to the NBS that it is no longer seen by the Government as the main provider of home loan financing?”