The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank’s governor says loan delinquencies are still “too elevated” compared to global standards even though - at 7 percent of total outstanding credit - they have fallen below pre-COVID levels and are at their lowest in 14 years.

John Rolle, in written replies to Tribune Business questions, said slow economic growth and relatively high non-performing loan rates have deterred Bahamian commercial banks and other formal lenders from extending credit to businesses and home buyers during the past decade in a trend that pre-dated the pandemic.

While total loan delinquencies, representing credit 90 days or more past due, stood just below $400m at $397m at end-February 2023, he added that it was economic growth that drives commercial bank lending rather than the other way around.

“In the domestic sector, the Central Bank is concentrated on making the environment more favourable to private sector lending as the basis for more positive medium-term outcomes,” Mr Rolle told this newspaper. “Growth prospects in the domestic banking sector are tied to the overall performance of the economy, more so than the economy being driven along by bank lending.

“This is because lending is more sustainable in the Bahamian domestic setting when the economy has the corresponding foreign exchange inflows to absorb the spending on imports that credit stimulates. Hence, slow economic growth on average over the last decade, coupled with the extremely high loan delinquency rate by international standards that persisted since the great recession, have discouraged growth in lending to the private sector.

“With the recovery of the economy from COVID-19, the non-performing loans rate has fallen close to 7 percent of total private sector loans. This improvement places the system just below where the rates were before the pandemic started, but it is still too elevated by international standards.”

At end-February 2023, the non-performing loan ratio stood at 7.4 percent, with both that and the $397m figure representing the lowest delinquency levels for 14 years since the peak of the 2008-2009 recession. Mr Rolle spoke as he moved to clarify reforms to the Central Bank Act that lower the regulator’s “lending limits” to 15.5 percent of the Government’s “average” or “estimated” ordinary revenue, decreasing it by almost half or 50 percent in percentage terms from the current 30 percent threshold.

He explained that this “redefined” limit applies only to loan advances made to the Government, while “capping” the latter at its current borrowing position with the Central Bank. “The Government does not lose the benefits from the bonds it had already issued,” Mr Rolle explained. “It just can’t use those channel for renewals or rollovers of any debt received through the Central Bank.”

Additional changes to the Central Bank of The Bahamas Act, tabled in the House of Assembly on Wednesday, will also prohibit the monetary policy regulator from acquiring any central government debt securities - or those it has guaranteed or have been issued by a public corporation - at their initial public offering (IPO) stage.

While the Central Bank will still be permitted to buy and sell such debt securities via secondary market trading, as part of its normal operations and to ensure there is sufficient system liquidity, he added that the Government will “not be able to raise any new money” from the regulator via these instruments once the reforms become law.

Mr Rolle, meanwhile, described The Bahamas’ first-ever credit bureau as the Central Bank’s most critical move in facilitating greater credit creation for the private sector. Commercial banks will be better able to identify good credit risks, and those most likely to repay their facilities, thereby ensuring solid borrowers gain better access, faster approvals and, potentially, lower interest rates.

“The most important Central Bank intervention to encourage lending growth is allow the credit bureau to mature in its operations,” the Governor added. “It will allow lending institutions to manage credit risk better, and be more confident about how to direct credit. The credit bureau helps to support responsible lending and reduce credit losses since it provides lenders with credit histories of borrowers.

“Where potential borrowers are overextended, banks will have an informed basis to deny credit. Conversely, where potential borrowers are not over-extended and can afford to repay loans, lenders can grant credit and offer concessionary terms. The Central Bank has observed in the last six months that banks and credit unions are recognising the benefits of the credit bureau and are starting to use the data retrieved from the bureau in their credit adjudication processes.

“The next needed support for improved lending outcomes is to have the moveable collateral assets registry established. It will give lending institutions an expanded set of secured collaterals against which to provide credit, especially for small and medium-sized businesses,” Mr Rolle continued.

“The Central Bank expects to complete the draft legislation for the registry in 2023, which would be recommended to the Government to enact, and to work with the Government to go through the process to identify a firm to provide the technology solutions for the registry.”

Mr Rolle, meanwhile, said the recent US bank failures involving Silicon Valley Bank and Signature Bank, as well as fears of global contagion that resulted in Credit Suisse’s ‘forced’ merger with UBS, have not impacted the Bahamian financial services industry and are unlikely to do so.

“The recent US bank failures have had little no impact on banks in this jurisdiction in terms of balance sheet exposure. We see the business models that were run by these US banks were completely different from the business of the more conservative private banking and wealth management carried out by international banks in The Bahamas,” he said.

Mr Rolle was backed by Karen Rolle, the Central Bank’s inspector of banks and trust companies in her latest quarterly letter to the industry, where she wrote: “With the current level of uncertainty and instability in global financial markets, the Central Bank of The Bahamas, like other regulators, continues to maintain close surveillance of Bahamian-regulated entities.

“On the whole, the stability of the sector’s balance sheet is not threatened by these events, although it is too soon to assess how the operational footprint of supervised financial institutions could be impacted. Nevertheless these upheavals underscore the importance of ongoing initiatives to strengthen The Bahamas’ crisis management framework.

“Crisis management and resolution have been important focuses of the Central Bank’s regulatory agenda over the years, recently resulting in a formalised legal framework for recovery and resolution for the banking sector. Similar emphasis is now being placed on developing a resolution approach for the credit union sector.”