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No automatic lending rise via Central Bank ‘shackles’ ease

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Gowon Bowe

• Banks warn ‘risk appetite’ will be key

• As regulator relaxes on debt service

• Industry gets ‘more flexibility, leeway’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank’s move to lift “the shackles” on lending limits does not necessarily mean borrowers will be able to obtain extra credit, commercial bank chiefs warned yesterday.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, and Kendrick Brathwaite, Bank of The Bahamas’ managing director, both told Tribune Business that “risk appetite” and assessments by individual institutions of a borrower’s ability to repay will still be the key factors in determining whether loans will be granted despite the regulator’s easing.

They spoke out after John Rolle, the Central Bank’s governor, signalled that it is relaxing its debt servicing requirement that borrowers - individuals, households and businesses - spend no more than 45 percent of their monthly income on repaying loan interest and principal.

He added that commercial banks have been given the go-ahead to implement this on “a case-by-case” basis for borrowers with solid repayment histories and the ability to afford higher debt service ratios, given that it will assist recovery from the economic devastation inflicted by COVID-19.

“The Central Bank is also accommodative, on a targeted basis, for businesses and households that would need access to credit, timed with when the recovery starts to take hold,” Mr Rolle said. “Banks are being allowed to relax loan qualification standards on a case-by-case basis so that qualified borrowers can take on debt service burdens above the levels normally stipulated by the Central Bank.”

Mr Bowe said the governor had indicated this easing would be coming when he met with commercial bank heads earlier this month, but warned that it will not necessarily translate into increased lending to borrowers that are already heavily extended or close to the 45 percent debt service threshold.

“The Central Bank intends to remove those barriers or hurdles if you will, but it’s a bit like Indian giving, if you will,” he explained. “You are removing the barriers for the banks to go out and lend, but at the same time the COVID-19 environment and accounting standards would mean you have to take a higher provision on that same level of lending.”

Pointing out that COVID-19 uncertainty, and the inability to forecast the economy’s performance beyond a week-to-week basis, will factor heavily into banks’ lending decisions, Mr Bowe added that their own credit and operational policies - as well as assessments of each loan applicant - will likely figure more prominently than the Central Bank relaxation.

“Banks are still going to have to make big credit decisions based on their assessment of when borrowers will recover and what timeframe,” he explained. “As far as the pandemic, I cannot see beyond the end of my nose. It’s a bit more moving forward by touch rather than sight.

“We’re all in the dark, but what the Central Bank is saying is they’re not going to put any shackles on the banking sector in deciding which credit prospects to take more risk on. It’s a double-edged sword. You can have an increased risk profile by the banking industry, which requires greater regulation and capital adequacy on the back end.

“It’s a zero sum game. It’s not a contributor, but it’s not a deflator. Banks have to make the decision. I hope he [Mr Rolle] did say, but I doubt he did, that the decision is that of the banks.” Mr Bowe said Bahamians sometimes believed the Central Bank can dictate lending policies and criteria to its licensees, but its role is that of regulator and such decisions are taken by Boards and management.

“The bank is allowed to make a full decision without any interference from the regulator, but it may not come to a different answer,” the Fidelity Bank (Bahamas) chief said. However, he added that the Central Bank’s move will force the industry to be more transparent with customers as it can no longer hide behind the regulator when refusing loan applications.

“We can no longer shirk our responsibilities, and have to say the decision was made by us,” he added.”We have to be very open and candid with our borrowers, and say we had to take into consideration a whole raft of issues,” Mr Bowe added. “Sometimes the decision may be negative, sometimes positive, depending on the credit history.”

Mr Brathwaite, who is also the Clearing Banks Association’s (CBA) chairman, told Tribune Business that extending credit beyond the 45 percent debt service ratio previously employed by the Central Bank depended heavily on an institution’s “risk appetite” and individual lending policies/guidelines.

Noting that some institutions provide loans to persons above that threshold, he added that the governor’s use of the term “case-by-case basis” was “very telling” in terms of how he wanted the commercial banking industry to approach the situation.

Emphasising that it does not imply a blanket, or across-the-board, easing, Mr Brathwaite said: “It’s general enough to cover all situations prevailing now. Whatever institutions are doing, he’s given them some additional leeway and more flexibility with debt service ratios.”

Acknowledging that the Central Bank had been “very lenient” during the COVID-19 period, he added that a “carte blanche” relaxation would have been “a dangerous road to travel” for the banking industry and its stability.

The Bank of The Bahamas chief also revealed there were still external limits to lending, such as the cap imposed by Atlantis which prevents workers committing more than 40 percent of their income to salary deductions and loan repayments.

“The tourism industry, the hotel industry are going to be struggling for a while,” he added. “Our market is the US, and they’re having COVID-19 challenges. It has to spill over to us. Until they get their market regulated at an acceptable level, we’re going to be at their mercy. The old saying: ‘When the US sneezes, we catch a cold’ is ever truer now.”

Comments

tribanon 1 year, 8 months ago

Here we see our central bank governor John Rolle capitulating to pressure from the IMF to put what remains of the financial soundness of our local commercial banking system on the sacrificial altar. The IMF would love nothing more than to see our local commercial banking system collapse before it then becomes the sole provider of credit for all economic activities within a financially destitute Bahamas.

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bogart 1 year, 8 months ago

"...spend no more than 45 percent of their monthly income on repaying loan interest and principal"

These bankers continue to use this archaic 45% ratio which was in existance from over 30 years ago from the previous century. The CRITICAL importance is to check that despite paying the loan payment for tbe figure to enrich the bank....the emphasis must be on the remaining 55 % percent fot the borrower and family to survive. These bankers fail to look out for the well being and success of these borrowings ...and not realize that the costs of the 55% percent budget itemms, cost of uti,ities, cost of groceries have far risen in prices for the borrower over the past 30 years this ratio favouring the bank with 45% and the REMAINING 55% percent not favouring the borrower, especially incomes are not in many cases rising in line with cost of living.

The 45%percent ratio is also mathematically incorrect when it deals with borrowers whose income is very high. High income borrowers after paying the loan can have thousands of dollars in their 55% percent to pau utilities, bills, groceries family expenses. High income earners can go beyond the 45% ratio.

Another factor the 45% percent is generally linked to an indemnity insurance which allows the bank to extend loan amounts to up tp 95% percent financing purchase price or Appraised value. This continued use needs to be carefully considered in light of fierce more often hurricames which can devastate entire islands and economy. The use of the Indemnits imsurance has conditions pertaining to economic conditions, etc some 30 years ago.

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bogart 1 year, 8 months ago

...above last para. The usage of the Indemnity Insurance used for purchase of houses commonly used for Mortgages.

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ThisIsOurs 1 year, 8 months ago

"Mr Rolle said. “Banks are being allowed to relax loan qualification standards on a case-by-case basis so that qualified borrowers can take on debt service burdens above the levels normally stipulated by the Central Bank.”"

but BOB was doing that for years allegedly... I wonder if that's where they got the idea

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