Highlights of the Financial Sector…Central Bank concerned about non-performing loans

Dec 16, 2016 News

By Kiana Wilburg
Reflecting on its accomplishments for 2016, Central Bank is convinced that it has remained steadfast in observing its duties to the nation. It has maintained price and monetary stability.

Central Bank Governor, Dr. Gobind Ganga

But there are still a few challenges within the financial sector that it remains concerned about, said Central Bank Governor, Dr. Gobind Ganga.
He made this, among other announcements, during a press conference which was held at the Bank yesterday.
With regard to challenges facing the sector, Dr. Ganga cited two cases; non-performing loans and de-risking.
A nonperforming loan (NPL) is the sum of borrowed money upon which the debtor has not made his scheduled payments for at least 90 days. A nonperforming loan is either in default or close to being in default.
Speaking the issue, the Central Bank Governor said that it remains a major challenge particularly to the banking sector since the last 18 months has seen the elevated level of non-performing loans.
He said that this was due in part to the decline in non-oil commodity prices and reclassification of exposures by a few banks.
Dr. Ganga said that non-performing loans remain the focus of intense scrutiny by the Bank of Guyana as it continues to monitor and encourage financial institutions to implement measures to reduce them.
As for de-risking, the Central Bank Governor said that the Financial Action Task Force (FATF) defines it as financial institutions restricting or terminating correspondent banking relationships with clients or categories of clients in order to avoid risk.
He noted that this phenomenon has had and continues to have noticeable consequences in financial services industries across the globe, particularly in developing states.
He said, “While foreign-owned banks operating in Guyana have not been subjected to de-risking, locally owned banks have been hard hit by de-risking, losing in aggregate, close to 37 percent of correspondent relationships by last June.”
He continued, “The two affected banks were able to establish new correspondent relationships to cover about 75 percent of those relationships that were lost. Each bank has at least one correspondent bank and we are working with the banks to establish other correspondent banks.”
The Central Bank Governor said that a major concern with the spate of de-risking is that legitimate transactions may go underground, encouraging the use of cash and increase other informal means. He said that the end result is likely to undermine the efforts to supervise and regulate the financial sector, fight money laundering and combat the financing of terrorism.
Dr. Ganga said that in 2015 CARICOM Central Bank Governors established a Technical Working Group on De-Risking and charged the Group to prepare a position that will inform a Caribbean perspective on this matter.
Following the completion of its work, he said, the Group posited several recommendations including, that Global regulators and international standard need to address the complexity of regulations and risk exposures which are contributing to biases in the incentive structure against certain classes of business.
Dr. Ganga said that Guyana has enhanced compliance with the implementation of recommendations by FATF and the Financial Stability Board.
“Additionally, along with our Caricom counterparts and other financial institutions, we continue to advocate with commercial banks in the United States of America and other countries to determine an appropriate way forward,” said the Central Bank Head.
He stated that the Caribbean Development Bank continues to work with the Caribbean Financial Action Task Force (CFATF) to help increase the capacity of member countries. He noted, too, that the IMF and the World Bank are also lending their voices to the nation’s advocacy.
Dr. Ganga added that last October, the FATF issued Guidance on Correspondent Banking Services. He said that for the time being, the Bank is conducting a preliminary assessment of how banking practices in Guyana compare to the recommendations of the FATF guidance and will address any gaps found.

ASSESSMENT
The Central Bank Governor asserted that during the period of May 10 – May 24, last, a joint team from the International Monetary Fund (IMF) and the World Bank conducted an assessment of Guyana’s financial system.
Dr. Ganga said that the Financial Sector Assessment Programme (FSAP) focused on the assessment of the stability, soundness and resilience of the financial sector as well as key aspects of financial sector development.
He said that the report of this assessment will be finalized with the next IMF Article IV of Guyana during the first quarter of next year.

INSURANCE
At the end of last September, Dr. Ganga said that the insurance sector consisted of 17 insurance companies. The companies include six life insurers, offering general life, health, annuities and pension’s products, and 11 non-life insurers, providing coverage for accident and liabilities, auto, marine and aviation and fire.
The Central Bank Governor said that the sector markets its products by direct means, brokers and agents.
He noted that the Insurance Sector accounted for approximately six per cent of total financial assets and 25 per cent of non-bank assets as at September 2016. He emphasized that the Sector was adequately capitalized. Both the long term and general Insurance Sectors’ assets exceeded their respective solvency requirements in keeping with the Insurance Act 1998.
With regard to the new Insurance Act which was passed in Parliament on June 30, 2016, and assented to by the President, the economist said that the drafting of attendant Regulations to the Act is presently in its final stages of preparation and when this is completed the Finance Minister will issue a commencement date.

2017 PROJECTIONS
For next year, Dr. Ganga said that the Bank will conduct risk based supervision of insurers with the commencement of the new Insurance Act and its Regulations.
He said that there will also be feasibility studies on the implementation of micro-insurance and micro-pension businesses. He revealed too that there will be continued re-engagement of stakeholders with respect to the draft Pensions Act. In this regard, he said that the passage of the Act is expected to be completed in the coming year.
He added that one can expect continued dialogue with participants of the insurance and pension sectors to ensure that they are aware of the requirements of the new regulatory regime, while seeking to enhance inclusion, penetration and overall profitability.
There will also be continued supervision of the insurance and pension sectors to ensure resilience in the sectors to withstand any adverse shocks, which in turn, will serve to strengthen the sectors’ financial stability.