The Tribune

• Describes ‘insatiable appetite’ for credit

• COVID to drive pay-day-to-pay-day rethink

• But ‘delusion’ to think habits alter ‘overnight’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Clearing Banks Association’s chairman yesterday said he hopes Bahamians have “learned their lesson” from COVID-19 about the need to withstand economic catastrophe by building-up savings.

Kenrick Brathwaite, also Bank of The Bahamas managing director, told Tribune Business that “a significant portion” of this society will now think twice about “pay day to pay day living” and excessive spending after the pandemic-induced shutdown left them without jobs and the means to earn a living.

Conceding that Bahamians have “an insatiable appetite” for borrowing, especially when it comes to consumer credit, he added that the financial desperation many families and individuals have been reduced to will likely provoke a lifestyle turnaround as the economy rebounds.

“I don’t believe it’s going to be changing significantly during the year” Mr Brathwaite said of the present bank lending conditions. “I believe we’re facing a flat curve even as persons come back to work, and the hotels come back online.

“I believe people will be more conservative. There’s a significant portion of people who have learned their lesson from COVID-19, and not to live pay-day-to-pay-day. You cannot survive a disaster like that. I know a lot of people have begun to save. There’s not been a significant drop-off in savings.

“They’ve learnt their lesson, and the lesson from COVID-19 is changing your lifestyle around; not living pay-day-to-pay-day or outside your means. Those persons don’t fare well in a disaster,” Mr Brathwaite added.

“I’m hoping they’ve learned their lesson; that savings and the savings lifestyle should be a significant portion of their daily and monthly routine. This allows you to withstand stress in the economy and the loss of income.”

Pay cheque to pay cheque living, though, was a reality for many Bahamians prior to COVID-19. When businesses and the economy shut down, their means of support went with them, forcing these persons to turn to the government and other avenues to provide funds to sustain themselves as the pandemic raged.

While few could have predicted the depth and length of the economic devastation inflicted by COVID-19, the general lack of a savings cushion or buffer among many segments of society undoubtedly worsened the effects and forced more than 25 percent of Bahamians to seek assistance from government-supported feeding initiatives.

Too many persons are also over-leveraged on consumer debt, although some observers would argue that the commercial banks share some responsibility for pushing these types of loans given that they are secured by salary deductions and thus seen as posing the least default risk.

Consumer loan applications continued to dominate the market in the 2020 second half via an 89.3 percent share, with the largest category of 4,681 - or more than 40 percent of submissions - concerning requests for debt consolidation. Only 2,790 such loans, or just under 60 percent, were approved.

Responding to the continued prevalence of debt consolidation loans, Mr Brathwaite told Tribune Business: “It’s always been a major part, and will be a major part. Bahamians have an insatiable appetite for borrowing.

“You go to the bank, go on to the credit union, go to the hire purchase company, go to the pay day lender and then come back to the bank and say you want to consolidate your debt.” He added that banks typically packaged different types of consumer loans, such as auto and vacation credit, so that these could be sold together rather than separately.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business to expect an increase in debt consolidation loans as a result of COVID-19’s economic fall-out as Bahamians increasingly sought to reduce debt servicing costs to the lowest possible level to bring relief amid prolonged unemployment and income loss.

“We can have a debate on consumerism and whether there needs to be a shift in borrowing to more tangible assets (homes) and investment strategies,” he added. “People are in the state they’re in because of consumer loans, and because of high consumer loan levels that require debt consolidation.

“If we believe that we have changed our practices for 20 years, and possibly longer, overnight because of the financial crisis we are deluding ourselves because persons do not have the financial headroom to change their financial practices. It’s going to be a work-out strategy that requires this will be with us for a long period of at least two to three years.”

John Rolle, the Central Bank’s governor, on Monday said non-performing loan levels and credit losses within the commercial banking sector due to the COVID-19 pandemic “are not forecasted to experience the magnitude of write-offs that occurred after the 2008 recession”.

“Already, banks have more than fully provisioned for losses on existing non-performing loans (NPLs), and they hold more than adequate capital for other shortfalls that could materalise. The non-performing loan rate at the end of March was 8.7 percent compared to a decade low of around 8 percent before the pandemic struck,” he added.

“As to the overhang of loans that are still benefiting from deferred payment arrangements, these were only about 7 percent of private sector balances in March compared to just over one-third of total loans earlier on in the pandemic.

“The deferrals highlight the pool of potential borrowers from which new delinquencies are most likely to be estimated. However, as employment is resumed, more of these arrangements are expected to return to payment status.”

However, Central Bank data showed that total loan arrears - which includes credit between 31-90 days past due, as well as the non-performing variety - rose by $68.1m or 9.4 percent in March to hit $796m, a figure equivalent to 14.3 percent of all outstanding loans.

“A breakdown by average age of delinquency revealed that short term arrears (31-90 days) advanced by $65.8m (27.2 percent) to $308m, thereby elevating its accompanying ratio by 1.2 percentage points to 5.5 percent. Similarly, non-performing loans (NPLs) rose by $2.3m (0.5 percent) to $488m, corresponding to an 8 basis point firming in the non-accruals rate to 8.7 percent,” it added.

The Central Bank did not say if this was a sign that more borrowers are starting to experience difficulties, but added: “A breakdown by loan type showed that consumer delinquencies grew by $50.4m (23.2 percent) to $267.1m, underpinned by respective increases of $47.2m (67.1 percent) and $3.1m (2.2 percent) in the short-term and long-term categories.

“Likewise, mortgage arrears rose by $30.8m (6.9 percent) to $475.6m as the short term segment increased by $30.7m (21 percent), while the non-accrual segment was relatively unchanged at $298.9m.

“In a partial offset, commercial delinquencies reduced by $13.1m (19.8 percent) to $53.2m due to both short and long-term balances declining by $12.2m (47.3 percent) and $0.9m (2.3 [percent), respectively.”

The Central Bank added: “Despite the rise in arrears, commercial banks decreased their provisions for loan losses by $6.5m (1.1 percent) to $573.7m in March. Consequently, the ratio of total provisions to arrears and to non-performing loans fell by 7.6 and 1.9 percentage points, to 72.1 percent and 117.6 percent, respectively.

“Similarly, the coverage ratio of specific provisions to non-performing loans reduced by 1.7 percentage points to 82.7 percent. During the month of March, banks wrote-off an estimated $13.8m in bad loans and recovered approximately $2.7m.”