HIGH LIQUIDITY SHOULD HELP TO EASE PRESSURE ON INTEREST RATES
Association of Banks in Fiji (ABIF) chair, Rakesh Ram has welcomed the high market liquidity as announced by the Governor of Reserve Bank of Fiji.
ABIF has also provided assurance that where possible, Banks will continue to pass interest rate reduction to customers.
The Association also wishes to clarify that interest rates are determined by various factors. One of the key factors is the quality of Banks’ credit risk, which has significantly escalated due to 90 days plus repayment deferments allowed by the Banks.
Generally, these would all be deemed as “past due” with appropriate level of provisioning for doubtful debt.
Other factors are cost of funds, demand for credit, liquidity situation, monetary policies, respective Banks or financiers own strategies, business modelling, etc.
Mr Ram stressed that liquidity is not the only factor that determines the interest rate in the market although it helps individual banks to determine rates offered to their customers.
The key concern for the Banks at the moment is the fast –escalating NonPerforming Loans that could potentially impact the financial and economic stability, a serious issue which was also recently highlighted by RBF Governor.
Banks are in the business of giving out loans, mostly from the deposits they receive from their customers but also from the capital provided by their shareholders.
If loans given by banks are not paid back by borrowers in the time and conditions agreed to, they become nonperforming.
Mr Ram warned that when a Bank fails due to very high levels of non-performing loans, and losses not mitigated adequately through provisioning, and additional capital, the stability of the financial system is weakened which can lead to a financial crisis.
“The flow-on effects are detrimental as the economy weakens, with negative impacts in the general lending environment, the payment system, the circulation of currency, and also the reputation of the financial system.
“Maintaining the safety and soundness of individual financial institutions like Banks, and the stability of the overall financial system is crucial in the current very challenging environment.”
To this end, with about $3.3 billion loan deferment provided as at 30 June 2020, even at a best case scenario of 10 per cent default rate, it will result in $330million of additional provision for doubtful debt.
Despite the concerns around escalating bad debts, Banks will continue to support customers during these difficult times through various options of loan deferments on a case by case basis, interest rate reductions, restructure of debt, working capital requirements and will continue to assess new lending proposals based on their Credit criteria. “Our commitment towards our people and communities remain firm and we will continue to serve our customers to the best of our abilities.”