The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank’s governor yesterday said he is targeting a commercial bank loan delinquency rate of “less than 5 percent” as some institutions push for an easing of lending restrictions.

John Rolle, unveiling the regulator’s half-yearly economic and financial outlook, conceded that the industry-wide non-performing loan rate eyed by the Central Bank was far lower than that achieved prior to COVID-19 and that it will “take several years” to reach that mark.

“On the non-performing loan rate, in The Bahamas we need to continue to target rates that average less than 5 percent,” he said in response to Tribune Business questions. “We were not even at that level before the pandemic started. We anticipate that the system will take several years to get to that level, but it’s important to continue to move in that direction.”

Non-performing loans represents credit that is 90 days or more past due, and on which the borrower is effectively either bankrupt or near bankrupt because they are unable to meet their obligations. As at end-June 2022, non-performing loans stood at $487.8m or equivalent to 9 percent of all total bank credit outstanding to companies and individuals, meaning at least a further four percentage point improvement is required.

Still, Mr Rolle said the latter figures represented a marked improvement on the delinquencies and payment deferrals reported in 2020 at the COVID-19 pandemic’s height. “While the lending environment remains risky, the average delinquency or non-performing loan rate now appears to have peaked since the most stressful periods of the pandemic,” he added. 

“It has declined at a steady, incremental pace since the beginning of 2022. Nevertheless, the Central Bank is continuing to target for the non-performing loans rate to be reduced considerably further below the levels that existed before the pandemic. Even then, these averages were considered too high to support a healthier private sector lending environment.”

Banks, though, continue to struggle to find qualified borrowers who meet their risk appetite when it comes to lending. “The increased holdings of foreign reserves, and the positive near-term outlook for these balances, leave the banking system in a position to sustainably accommodate more domestic credit expansion. Positioned as such, the system is able to accommodate both the public sector’s projected net borrowing needs and expanded lending to the private sector,” Mr Rolle added.

“So far, however, lending to the private sector has remain subdued, still reflecting limited opportunities for banks to expand credit to new prospective borrowers given heightened risks that still persist within the environment. Where creditworthy borrowers exist, the Central Bank is reviewing what additional flexibility banks could be given while continuing to observe prudent limits on the burden of debt borrowers take on.”

When asked by Tribune Business what this “additional flexibility” will involve, Mr Rolle said the Central Bank had been “fielding some requests” from licensees for an easing of the down payment requirements for especially creditworthy borrowers when it came to mortgage and personal loans.

“What we continue to be mindful of is that banks often have in their mix of creditworthy borrowers individuals who they provide loans to on more relaxed equity or down payment requirements,” Mr Rolle said. “We’ve been fielding some requests from banks for us to look more closely at the down payment that typically applies on personal loans, mortgages and the like.

“We’re looking at that, but it’s also always subject to the borrower’s overall capacity to carry the debt having regard to their total level of indebtedness, and the overall capacity they have based on their earnings with which to repay the debt.

“Banks have some categories of borrower where they prefer to have more flexibility within their qualifying criteria. Our focus as regulators will be on how they manage their overall asset quality, particularly how they manage the impact of any relaxation on the delinquency rates they experience.”

Mr Rolle said foreign exchange flows indicated a strengthening Bahamian private sector as the economy continues to reflate following COVID-19. “In 2022, the foreign exchange markets resumed a more entrenched seasonal pattern of positive net inflows through the private sector. Over the first half of the year, commercial banks reported a 50 percent rise in total purchases of foreign exchange from the private sector,” he added. 

“The system also experienced a one-third rise in local demand for foreign exchange, mostly to pay for imported goods and services. Net of such usage, the private sector contributed to more than half of the net foreign exchange that was consequently retained by the Central Bank over the first six months of 2022, and which helped provide the strong increase in external reserves.

“The foreign reserves also increased due to the Central Bank’s purchase of net proceeds from foreign currency borrowings by the Government. In contrast, transactions with the Government had explained more than four-fifths of a much lesser build-up in reserves that occurred in the first half of 2021.”

Mr Rolle, responding to Tribune Business questions, said the investment currency market (ICM) - which facilitates overseas portfolio investments by Bahamians and local entities in stock market securities and real estate - has “shown considerable strengthening in terms of the rebound” since it re-opened last year.

“We are on trend to see use in that market exceed any of the prior years, so we are not very far off from reaching new heights in terms of the investment currency market,” he revealed. “That reflects largely the kinds of investments that Bahamians are making in foreign stock markets, and drawing some interest - though not dominant - but some interest within the market has been in cryptocurrency and other types of investment.”

“Further reforming exchange control remains in the mix, continuing to emphasise those aspects of policies that affect the ease of doing business and long-term investments. Given downside risks to the economy, policy changes targeting portfolio investments and liquid financial flows continue to require a very gradual approach, as these would have a more immediate impact on our ability to maintain the currency peg,” Mr Rolle added.

Among the exchange control aspects to receive near-term attention, he said, will be the ability of Bahamian entrepreneurs and small businesses to access external financing sources outside the country. The Central Bank governor said he was also aware of “the pain points that need to be addressed” within the country’s payment system to improve access to, and take-up, of digital channels and encouraging movement away from reliance on cheques.