Nonperforming loans and the decline of lending by banks

Jan 28, 2018 News

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One of the core functions of a bank is to provide loans so that companies can make worthwhile investments that would lead to job creation. On a much smaller scale, loans to individuals can assist them in the purchase of a car or the construction of a home.
But it is not only the individual or company that benefits from this arrangement. The bank is also expected to benefit as it earns money from the interest it receives on these loans.
When a bank gets involved in this practice, it is not without risk. The bank can never be sure that the company or individual will repay the money within the agreed time span.
If the borrower stops paying back the loan or the interest, after a specific amount of time the bank must classify the loan as a “bad debt” or “non-performing”.
The overall manager of loans in Guyana’s financial system is Central Bank. Officials from the Central Bank generally consider a loan to be non-performing when more than 90 days have passed without the borrower paying the agreed installments.
This often happens when a borrower faces unexpected financial difficulties, for example when an individual loses his job and therefore cannot repay their mortgage as agreed, or when a company experiences financial constraints.
In the worst case scenario, the borrower is completely unable to repay the loan and the bank needs to correct the value of the loan on its balance sheet – sometimes even to zero. This is often referred to as “writing off” a loan.
To be successful in the long run, a bank needs to keep the level of bad loans at a minimum so that it can still earn a profit from giving out loans.
Once the value of non-performing loans exceeds a certain level, the bank’s profitability suffers because it earns less money from its credit business. Banks need to put money aside, i.e. make a provision, as a safety net in case they need to write down or write off the loan at some point in time.
Both the drop in income and the money set aside for the worst-case scenario result in the bank having less money available to provide new loans, further reducing its profits.
A bank with too much bad debt cannot properly provide companies with the credit they need to invest and create jobs. If this happens to many banks on a large scale, it affects the economy as whole and therefore individual members of society. Reduced investment by companies and a lower number of newly created jobs lead to less growth.
This essentially sums up the situation that has been taking place in Guyana over the last few years. It is at this point, we shall dive head on into the hardcore statistics.
REVIEWING 2016
Reflecting on its accomplishments for 2016, Central Bank is convinced that it has remained steadfast in observing its duties to the nation as price and monetary stability was maintained.
But there are still a few challenges within the financial sector that it remains concerned about.
According to Central Bank Governor, Dr. Gobind Ganga, the issue of nonperforming loans remained a worrying issue.
The Central Bank Governor said that it remains a major challenge since the last eighteen 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 same.
The level of non-performing loans deteriorated by a further 17.1 percent (following the 41.5 percent rise at end-December 2015), to close at G$30,286 million at end-December 2016.
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 end 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 end-December 2015.
The three remaining LDFIs’ loan portfolios improved with their nonperforming loans declining within the range of 1.9 percent to 8.3 percent. The 17.1 percent rise in the overall level of nonperforming loans was due mainly to a 12.2 percent ($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-sector accounting for 75.6 percent of the manufacturing sector; and the distribution subsector (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 nonperforming loans at end-December 2016 was 44.6 percent, up from 37.7 percent at end-December 2015.
Risk Assessment
The overall assessment of the banks’ credit risk remained high and increasing as the ratio of nonperforming loans to total loans rose to 12.9 percent, up from 11.5 percent at end-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 NPLs. NBS’ credit risk rating was assessed as low and stable while HIHT’s was assessed as high and decreasing.
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 end-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 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 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 end-December 2015.
2017 PERFORMANCE
Lending by banks continued to be hampered due to a high level of nonperforming 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 June2016.
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 nonperforming loans combined with apparent risk aversion continues to hamper bank lending.
On a sectoral basis, NPLs 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-June 2016 levels. (Statistics and data provided by Central Bank)

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