$18B bad debt situation alarming
By Gitanjali Singh
December 28, 1999
National Bank of Industry and Commerce Ltd's (NBIC) Managing Director, Nigel Baptiste, says 33% of the banking sector's loan portfolio in bad debt is "alarming" and is an indication of the state of the economy.
Baptiste, a Trinidadian, said such a scenario played out in Trinidad and Tobago in the mid 1980's during the oil crisis when the bad debt portfolio in the banking sector was high. He pointed out that it was not possible to have an economy in crisis and the bad debt levels in the banking system low. However, he added, now, the bad debt level in Trinidad's banking sector is below ten percent and is no more than four percent in developed countries.
"It [the $18 billion bad debt situation in Guyana] is a cause for concern. The [commercial] banks will survive as the bad debt is not a reflection on the soundness of the banking sector. But will the economy [the businesses under threat survive]?" Baptiste queried.
Baptiste, noting that it was compliance with the Financial Institutions Act which has caused the bad debt portfolio to increase, said that if there was any further "bottoming out" in the Guyanese economy, this figure could worsen. Otherwise, he sees an incremental increase in the bad debt portfolio depending on the state of the economy.
"What you would see increasingly is banks taking more debt recovery measures and being more active in this regard," Baptiste said, noting that bad debts are never really written off.
But Baptiste conceded that almost 50% of the reason for the enormous bad debt portfolio is the inadequate assessment of the risks by banks. He pointed out that with the boom in the rice industry several years ago, credit to the agriculture sector increased and players in the rice sector invested in land and real estate, leaving limited surplus liquidity. When the situation in the rice sector took a turn for the worse, the rice industry had little liquidity to fall back on. He also noted that there was a slump in the real estate sector so that the original value on properties invested in could not be had.
"What causes businesses to fail is not profitability but liquidity," Baptiste said, noting that in some cases in Guyana, borrowers made downright bad decisions.
In the case of NBIC, Baptiste denied that it was unsecured loans which have carried up the bad debt portfolio of the bank to its current $4.4B. He noted that the unsecured aspect of loans did not affect classification but rather provisioning. The classification of loans under the FIA enacted in 1995, was changed so that once three months elapsed and a loan was not serviced it was classified as bad and could not be grouped with the performing loans if it started being serviced until a year has passed. Banks do not have any flexibility in treating with the new classification.
Baptiste noted that many loans which should have correctly been classified as bad were not for many years. He estimated that the agriculture sector accounts for about 60% of the loans which have gone bad and the bulk of the 40% is in the quasi manufacturing sector.
And Baptiste does not believe that it is altogether true that it is this large bad debt portfolio which is reflecting itself in the supposedly high spreads between banks' deposit rates and lending rates.
Chief of the IMF's Caribbean Mission, Gopal Yadav, asked about the increasing number of bad debts in the banking sector recently confirmed the increase and said that this was partly reflected in the spreads of commercial banks. And asked about the supervision of the Bank of Guyana he said that this needed improvement and that the IMF was continuing to support the initiatives in this regard.
But Baptiste noted that the real spreads of the banks were much lower than they appear as there are a few companies which contribute the most to the bank's deposit base and they call their price. And in the case of loans, businessmen also negotiate these and they are most times lower than the advertised rates at the banks. Combined, these lead to a smaller spread than appearances suggest.
Asked whether he believed the Bank of Guyana's supervision was adequate, Baptiste said that it was adequate at this point in time. He also said that no amount of safeguards could really protect against bad debts if the bottom of the economy fell out.
Baptiste was asked whether he would consider the rice millers' proposal of a five-year moratorium on paying interest on their loans given what is taking place in that sector. He responded that he was open to anything that would yield tangible results but would have to be sure that he is preserving the integrity of the bank, its customers (including rice farmers), employees and stockholders in the process.
"NBIC has been here for donkey years and we have to be open to realistic arrangements and not something which defers a problem but a solution which can be tangible," Baptiste said.
A © page from: Guyana: Land of Six Peoples