The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

More than 6,000 Bahamian borrowers applied for debt consolidation loans during the 2019 first half, making it the most sought-after form of consumer credit by some distance.

The Central Bank’s latest Lending Conditions Survey, released yesterday, revealed that debt consolidation loans accounted for more than one-third of all consumer loan applications during the six months to end-June 2019.

The volume of applications was also 50 percent greater than the next most-popular form of consumer loans, namely credit cards, for which Bahamian commercial banks received around 4,000 applications during the 2019 first half. Travel loans, for which there were almost 3,000 applications, ranked third by loan type.

The Central Bank data further exposes the breadth and depth of the pressures faced by financially-struggling Bahamian households, individuals and businesses, as debt consolidation loans are typically a last resort move to rescue troubled borrowers by combining all their outstanding loans into one to reduce the debt repayment burden.

It also highlights how the risk averse Bahamian commercial banking industry continues to concentrate its lending efforts on loans for cars, furniture and appliances, and the luxury “bells and whistles” of life - something that threatens to deprive the economy’s productive elements, namely the housing market (mortgages) and private sector (businesses) of much-needed financing capital.

The Central Bank survey revealed that out of 19,712 loan applications processed during the 2019 first half, some 91 percent - more than nine out of ten, or just under 18,000 - related to consumer loans. The commercial banking industry, badly hit by the housing market crash following the 2008-2009 recession, now views consumer loans as less risky because they can be secured by salary deduction.

While the total number of loans processed represented a 17 percent increase compared to the 2018 first half, the Central Bank said: “Consumer loan applications dominated at 91 percent of total requests; 84 percent were approved. Most loan denials were due to high debt service ratios, lack of collateral or no down payment.”

However, just 53 percent of mortgage applications were approved to further illustrate the ongoing difficulties many Bahamians have in meeting the banks’ more stringent qualifying requirements to enter the housing market.

“Mortgage applications rose in comparison to 2018; 53 percent of requests were approved,” the Central Bank added. “Most applications were for purchases of already built homes... but growth in financing requests for new construction mortgages was also noted.

“Demand for commercial credit also firmed vis-à-vis the first half of 2018; the approval rate was 86 percent.” The Central Bank data collected from its banking licensees showed that second quarter loan applications, in particular, hit their highest levels for three years.

The main reason why consumer loan applications were rejected was because the potential borrower’s existing debt service ratio was too high, which typically means more than 40-45 percent of their income is already going to pay existing debt obligations.

This accounted for 30 percent of rejections, with the inability to make downpayments or provide collateral security for the loan attributed to another 9 percent and 23 percent , respectively. Underemployment, an inability to provide evidence of income and delinquency on previous loan facilities were also cited as factors for why the banks turned down applicants.

As for mortgages, the Central Bank’s survey found that there were around 1,100 such loan applications submitted during the 2019 first half, with the majority - some 800 - focused on acquiring existing properties.

Yet again, though, 43 percent of rejected applicants were turned down because they were already carrying too much debt. The inability to make a downpayment also cost another 10 percent of those who were rejected.

John Rolle, the Central Bank’s governor, yesterday said that 15 percent of loan applicants “on average” were unsuccessful in obtaining credit from commercial banks due to issues such as their existing debt burden and failure to supply downpayments and/or collateral to secure the financing.

“Generally the economy has been improving,” he said. “More and more persons have been able to qualify for credit, and more persons are being encouraged to apply for credit. We see a lot of interest from the consumer.” While commercial bank lending was concentrated in consumer loans, an “increase in interest for mortgages” had also been seen.

Pressed by Tribune Business as to whether the banks’ focus on consumer lending was a problem for other sectors of the economy, the Central Bank governor replied that despite going through “cycles where one category of lending is stronger than another, the overall structure of banks’ loan positions has not changed radically in recent periods”.

He added: “Residential mortgages are still a very important part of bank lending, The productive side of the economy, it’s construction and renovations around housing that are important to bank lending. To the extent the mortgage market shows real signs of interest, that’s a positive for banks lending to construction.”

Focusing on the positives, Mr Rolle said: “Prior to the hurricane, there were signs of a marginal turnaround in private sector lending as the contraction in credit tapered off. The Central Bank expects overall lending to begin to expand over the near-term, as new lending outpaces ongoing repayments.

“Some results from the Lending Conditions Survey released today show that demand for credit is now trending stronger than in 2018. Banks have also approved a larger share of recent applications than in the past. The most common reason for unsuccessful loan applications continues to centre around households already carrying too much debt or putting up insufficient collateral to secure the debt.”

The Central Bank revealed that total Bahamian dollar credit outstanding for the first nine months of 2019 contracted by $22.2m compared to a $39.1m expansion during the same period in 2018.

“Net credit to Government declined by $15.8m, relative to a $114m increase in 2018,” the regulator added. “Credit to public corporations contracted by $18m, slowing from the $25.6m expansion in 2018. Private sector credit rebounded by $11.6m vis-à-vis the prior year’s decline of $100.6m.”

While commercial credit to the private sector grew by $47m, and consumer credit by $32.9m, mortgage loans outstanding narrowed slightly by $2.6m in the 2019 first half,

Elsewhere, Mr Rolle said The Bahamas’ foreign currency reserves were projected to end 2019 “at exceptionally strong levels potentially above $1.5bn” due to reinsurance inflows associated with Dorian-related payouts and government spending on restoration.

“Hurricane rebuilding will place an increased demand on foreign exchange usage. In this context, the Central Bank expects that external reserves could decrease slightly during 2020. These resources will be spent on construction materials, foreign services and other recovery related imports during 2020,” Mr Rolle said.

“Access to foreign exchange in this mix is an essential part of The Bahamas’ ability to recover from hurricanes without putting the value of the Bahamian dollar in jeopardy. For the Government and households it is, therefore, most advantageous to reduce debt as much as possible in ordinary times so that comfortable space can exist to borrow in times of emergencies......

“As of today, the external reserves are just above $1.5bn, which is about $200m higher than at this same point last year. It captures some of the initial reinsurance inflows, but also stronger net retention of tourism and foreign investment receipts from over the first nine months of the year.

“Some of The Bahamas’ rebuilding will also use foreign exchange from ongoing earnings on tourism and foreign investment activities, and some costs will be covered from savings which some families and business have stored up.”