Non-performing loans remain high - IMF

While bank capital adequacy ratios appear comfortable (averaging 25.4 percent as of end-2016), nonperforming loans remain high and bear close scrutiny, the International Monetary Fund (IMF) said yesterday.

Expanding on its Article IV consultation with Guyana in May and following an executive board meeting, the IMF said “..non-performing loans remain high, at 12.9 percent of total loans at end2016 from 11.5 percent at end-2015 and provisioning remains very low (45.8 percent at end-2016)”.

Key commercial banks have reported increased numbers of non-performing loans and expanded provisioning for this though the IMF does not think this has gone far enough.

“Directors noted that the banking sector appears resilient to severe shocks, and welcomed the authorities’ plans to continue bringing the supervisory and regulatory frameworks in line with the 2016 FSAP (Financial Sector Assessment Programme) recommendations. They encouraged further steps to reduce the stock of nonperforming loans, and higher provisioning to account for slow collateral recovery, unrecorded relatedparty exposures, and loan misclassifications. Directors also called for amending the Financial Institutions Act to operationalize the crisis management framework and establish an emergency liquidity assistance framework”, the IMF said in a statement yesterday,

In its staff report also released yesterday, the IMF said:

“Growth in monetary aggregates and credit has been subdued due to the economic slowdown and lower lending from banks seeking to strengthen their balance sheets. Private credit growth further declined to 2.1 percent in 2016 from 6.2 percent in 2015 mainly owing to a significant fall in credit to businesses (-2.9 percent) and reduced lending to households and the real estate sector. The 91-day Treasury rate declined to 1.68 percent at end-2016 from 1.9 percent at end2015, implying an ex ante real rate close to zero.

“The risks to the banking system have increased with weak activity in key sectors of the economy. The non-performing loan (NPL) ratio rose to 12.9 percent of total loans at end-December 2016 up from 11.5 percent at end2015 and provisioning remains very low. Banks continue to respond by tightening credit. One domestic bank accounts for about a half of NPLs, though it has extended only a fifth of loans. The banking system reports high profitability and capital buffers, which for some banks are overstated due to underprovisioning, loan misclassifications and unrecorded related-party exposures”.

Staff further encouraged the Guyana authorities to improve the oversight framework in line with the May 2016 FSAP recommendations.

“Heightened banking sector vulnerabilities raise the urgent need for ensuring consistency of bank supervisory oversight, from routine supervision to intervention and resolution which, despite some progress, needs to be improved further. The BoG (Bank of Guyana) should also undertake more timely and effective remedial actions to address banks’ severe under-provisioning and related-party lending, and should seek prompt corrective actions from banks based on deficiencies identified in onsite supervisory monitoring. Other FSAP recommendations include raising the minimum capital adequacy requirement to 12 percent; eliminating reduced provisioning requirements for “well-secured” portions of NPLs; discouraging the use of overdraft lending to facilitate better credit risk monitoring; and aligning the definition of “related parties” with international standards. Upstream and downstream ownership of institutions should be monitored to ensure better consolidated supervision”, the staff report said.

Staff recognised the BoG’s progress on constructing a crisis preparedness and management framework, but highlighted the need for further improvement.

“Importantly, the crisis management framework should legally empower the BoG to resolve failing institutions in an orderly resolution without requiring court approvals. The authorities have drafted a deposit insurance scheme (DIS). But in line with FSAP recommendations, staff cautioned that the DIS should be established only after introducing an effective resolution regime and formalizing the framework for Emergency Liquidity Assistance (ELA). This will require amending the Financial Institutions Act (FIA). The introduction of a formal ELA framework should provide needed support for the financial system in case of a liquidity crisis”, the staff report said.

Staff also encouraged the authorities to take further steps to ensure financial sector resilience and deepen financial development. These entail enhancing the collection of bank and non-bank data and undertaking systemic risk monitoring, including of banks’ ownership linkages and related-party lending; implementing the new pension and insurance laws speedily and thus aligning regulation and supervision with international standards. It also emphasized the designing of a strategy for integrated development of the National Payment System to support the payment needs of the economy and financial deepening. A deal was recently struck with the World Bank for this.

The staff report said that the authorities here stated that the past deterioration in asset quality has prompted enhanced monitoring and intensive follow-up actions in an effort to ensure that the level of credit risk does not escalate further.

“They noted that NPLs are concentrated among a few large borrowers who have solvent businesses, but are facing liquidity problems for different

reasons (some were affected by the loss of the Venezuelan rice market, others by delays in government capital spending). Provisioning has also increased significantly. They continue their risk-based approach to onsite inspection of banks. More frequent examinations of banks are conducted with greater emphasis on assessing the institutions’ credit risk management practices and asset quality reviews. Meetings are also convened with the Board of Directors of the institutions to discuss concerns in relation to asset quality, credit risk management and remedial actions to be undertaken to reduce the level of NPLs. More frequent reporting is also required from institutions to track progress on actions taken to reduce the high level of NPLs. The BoG also conducts stress testing of the loan portfolio to determine its vulnerability to various shocks”, the staff report said.

The staff report said that the authorities here will continue to closely monitor the strength of the financial system and plan to accelerate implementation of other FSAP recommendations, with technical assistance.

“They have started implementing many of the recommendations from the FSAP and have engaged with the banks to make them aware of the main challenges facing the financial system. They are reviewing BoG’s guidance on provisioning requirements for “well-secured” loans but are waiting for the recommendations of a regional working group on the matter. Discussions are under way with the World Bank on technical assistance to amend the FIA. The draft Pension Act should be passed by the end of the year. A new Insurance Act was passed in June 2016 and implementing regulations are being drafted. This Act, which was prepared with technical assistance from the World Bank, will correct regulatory and supervisory failures that were highlighted by CLICO’s bankruptcy”, the staff report said.