The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) has urged the Government to abandon its proposed Mortgage Relief Plan and instead create a “specialised agency” to tackle the Bahamas’ bad loan crisis, with private sector credit having dropped to 2009 levels.

The Fund’s Article IV report on the Bahamas, obtained by Tribune Business, gives no details on the ‘specialised agency’ proposal that IMF officials discussed with the banks and the Government during their visit earlier this year.

There is no information on how it might operate; its staffing; capitalisation; and structure, but the IMF made clear it views such an agency as “a possible successor to the Government’s Mortgage Relief Plan”.

“The authorities should consider the merits of an adequately capitalised specialised agency to help resolve debt overhang in the banking system,” the IMF said.

“Staff noted recent efforts of the authorities and some banks to address long-standing non-performing loans, and discussed the potential advantages of establishing a specialised agency, including a possible successor to the Government’s Mortgage Relief Plan.”

The IMF warned that non-performing commercial bank loans, standing at 16 per cent in March 2015, were an impediment to new lending and the financing of economic growth.

It also implied that the Bahamian commercial banking industry was not entirely blameless for its non-performing loan woes, adding that it was dealing with “the legacy costs of previous over-lending” prior to the 2008-2009 recession.

“Staff noted that the Bahamian credit channel remains impeded by a nagging debt overhang,” the Article IV report added.

“Given the private sector’s sizable loan burdens, subdued employment prospects, and tightened credit requirements, new loan demand creation remained muted amid overall deleveraging.

“Resolving the debt overhang will help preserve financial stability, allow for specialised management to maximise the value of distressed assets and permit banks to focus on their core business of lending, thereby supporting the recovery.”

The Fund added: “Despite facilitating bankruptcy laws, banks remain reluctant for both economic and social reasons to press for accelerated resolution of non-performing mortgages.

“Staff noted that excessive time delays and high costs of property registration, and inefficiencies in the enforcement of contracts, also likely weighed on the resuscitation of bank lending.

“However, recently introduced rules for civil procedure focused on streamlining court proceedings and promoting less costly dispute resolutions may prove beneficial.”

The IMF said that due to subdued lending, the commercial banking industry’s net domestic assets fell by 2.6 per cent through December 2014. Industry-wide capital adequacy, which exceeded 33 per cent of risk-weighted assets, remained above the Central Bank’s 17 per cent target.

As for the so-called ‘offshore’ or international banking sector, the IMF noted that its total assets had declined by two-thirds in terms of their size relative to Bahamian gross domestic product (GDP).

“Changes in the international regulatory environment, as well as more firm or country-specific influences, have resulted in a marked decline in offshore sector assets,” the IMF said.

“These have declined from a 67 times domestic GDP in 2011 to less than one-half that amount in 2013 (and further to 22 times GDP in September 2014).”