The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

“Interference” in loan recoveries has made it extremely challenging for the Bahamas Development Bank (BDB) to claw back even 50 percent of its credit losses, international consultants have revealed.

Canada-based International Financial Consulting (IFC), in laying out the state-owned institution’s 2020-2024 strategic plan, did not give specific examples or detail the nature of this “interference” that has contributed to the drain on Bahamian taxpayers since the BDB’s creation in the early 1970s.

However, the report is likely referring to the role played by politics, as it warned that a change in the governing political party “can steer the bank away from its primary areas of focus, causing its operations and long-term goals to be hindered”.

While the government last week lauded the fact that non-performing loans had been slashed from 76 percent of the BDB’s portfolio to just 24 percent, the Canadian consultants revealed that long-standing efforts to realise loan security pledged by troubled borrowers had been impeded by non-financial motives.

The IFC report, which has been obtained by Tribune Business, said: “In terms of collections and recovery, interference in the resolution, collection and workouts has affected BDB’s business performance. The situation deteriorates over time as collateral valuations become uncertain after extended periods.

“BDB has accumulated much collateral property and it is now challenging to recoup the appraised value, or a value sufficient to mitigate as much as 50 percent of BDB’s losses.”

The consultants’ report, and new strategic plan, set out numerous explanations for why BDB had produced a $62.536m “accumulated deficit”, representing the combined losses it has racked up since its creation, and a negative net worth of $33.302m at end-2018.

Noting the BDB’s “poor reputation”, IFC said “a very low risk appetite” for lending and the “moral hazard” associated with being a government-owned institution had to be overcome if the BDB is to realise the ambitious goals set out in the strategic plan. The latter factor, it added, meant that too many borrowers have not repaid their loans because they believed there were no consequences for not doing so.

“BDB is still experiencing the burden of its poor reputation,” the report said. “The moral hazard of BDB being perceived as a ‘government bank’ impacts it negatively as people have less willingness to repay their loans.

“Additionally, there is a lack of clarity in positioning. Stakeholders and the general Bahamian public are not fully aware of the scope of BDB’s activities, as they are not clearly marketed and defined.”

While this was now being rectified by the BDB’s new branding campaign, IFC added: “BDB has a very low risk appetite which leads to collateralised lending (90 percent in the Family Islands, and 100 percent in New Providence).”

Suggesting that this was not appropriate for a development bank-style institution, which should be willing to find and take on greater risk associated with lending to entrepreneurs, the report said: “Its lending and financial policies and systems require enhancement to include risk-based analysis, pricing, portfolio management and provisioning.

“At the same time, BDB needs to balance profit and loss and development impact in order to have long-term sustainability. It is a difficult balancing act at the best of times, and particularly challenging when there is a history of financial losses, a poor repayment discipline among its client base, and weak collection efforts or capabilities.

“Finally, collateral values have proven to under-perform expectations of risk managing the portfolio, and resultant losses have impacted the bank’s ability to fulfill its strategic mandate.... There is a lack of delegative authority, particularly in credit decisions, for more efficient and effective execution,” IFC continued.

“The lack of authority results in slow response times to potential clients and new business, and a lack of ownership and accountability throughout the bank.” The report’s authors added that the BDB’s acquisition of borrower clients had typically been “reactive rather than proactive, leading to the potential for adverse selection within its lending portfolios”.

“The credit application process is not smooth or compelling,” IFC found. “Client onboarding occurs before or is simultaneous to the initial credit decisioning, resulting in stringent and lengthy requirements of documentation.

“As a result the experience is not client-centric, damaging BDB’s reputation in terms of the timeliness and professionalism of the services provided. To enhance this aspect of operations, BDB needs a policy for conditional approval subject to due diligence, Know Your Customer, anti-money laundering for better turnaround.”

The Canadian consultants said the BDB had traditionally preferred a “desk-based” process for selecting borrower clients, the risk they present and the monitoring of any loan repayment delinquencies. This, they added, was the opposite of the small and medium-sized enterprise (SME) approach that was required and “has the effect of diminishing the value of its relationship management”.

“This desk approach, and the lack of data, and current information regarding its clients, leads to challenges in following up with clients, poor client engagement, lost opportunities for further financing with the client and few or no referrals from the existing client base - the latter being the most cost-effective origination and brand development model of finance,” the report added.