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Banker ties fallout of ‘get rich’ schemes to rising loan delinquency
Julian Richardson, Business Observer reporter richardsonj@jamaicaobserver.com
published by jamaicaobserver.com
Wednesday, October 08, 2008
CLARKE… This is in fact a very serious problem
While there is no empirical data to highlight the number of borrowers that have been directly compromised from the fallout in the alternative investment schemes, a sharp spike in the amount of delinquencies on loans in recent months has raised a few eyebrows in the commercial banking sector.
Scotiabank president and CEO Bill Clarke, at a Financial Services Commission investment luncheon last week, said that there are indications that a lot of persons were affected by the collapse in the high-return “get-rich” schemes, and he suspects that an increase in the number of persons who are unable to service their loans with his institution may be related to the fallout.
“In our retail banking business, we have found that over the last couple of months that there has been an escalation in delinquencies,” said Clarke. “But when we enquire as to why arrangements are not being made as originally agreed, the answer that we have been getting is ‘our revenue stream is so much impaired’.”
Clarke said that a challenge in measuring the impact of the fallout arises from the fact that many persons are hesitant to disclose their involvement with the collapsed entities.
“This is in fact a very serious problem,” said Clarke. “There are people who are so afraid to even speak about it that they are not sure sometimes to what degree people have been affected.”
The two most prominent alternative investment schemes - Cash Plus and Olint - have been unable to pay lenders or members for some time now, with Cash Plus estimated to have held over $20 billion in outstanding loans at one point, being unable to pay out its 10 per cent or close to $2 billion a month from as far back as a year ago. The link between the schemes’ fallout and the banks’ loan portfolio is made because it is suspected that some persons invested borrowed money in the failed entities or were servicing loans with their monthly returns from these entities.
The fact is that bad debts held by domestic financial institutions have grown over the last year to the highest it has been since the 1990s financial crisis. According to Bank of Jamaica (BOJ) data released in August, up to June 2008, $7.4 billion in non-performing loans - loans in arrears for three months and over - was in the system, up 41 per cent over last year, even as loans grew by half that amount.
Mortgages were the hardest hit in this category, up 71 per cent year on year to $2.1 billion, whilst commercial banks’ non-performing loans grew 35.8 per cent to $4.6 billion and near-banks’ non-performing loans grew 3.7 per cent to $558 million.
While Clarke only referred to the increase in delinquencies over the “last couple of months”, a look at Scotia Group’s third quarter, ended July 31, 2008, financial report reveals that non-performing loans increased by $590 million year-to-year. At the end of the period, the group’s non-performing loans represented 2.35 per cent of total loans and 0.82 per cent of total assets compared to 1.76 per cent and 0.62 per cent respectively in the prior year.
Over the same period under review at National Commercial Bank (NCB), the second most profitable listed company in Jamaica (Scotia is the most profitable), non-performing loans as a percentage of gross loans fell by 58 basis points to 2.34 per cent at the end of June. However, a move by the institution to increase its provision for credit losses by 140 per cent over the 12 months to June 30 have led some analysts to believe that the commercial bank is preparing itself for the potential impact of the fallout of the investment schemes.
NCB’s provision for credit losses increased from $39.1 million to $93.1 million from the end of the 2007 June quarter to the end of this year’s June quarter. Year to date that figure increased 102 per cent from $151.3 million to $307 million. According to the bank in its financial report, a provision for credit loss is established if there is objective evidence that a loan is impaired. A loan is considered impaired when management determines that it is probable that all amounts due, according to the original contractual terms, will not be collected.
“It would be prudent [to increase the provision] in order to make sure there are no surprises,” said Neilson Rose, equity asset manager at Mayberry Investments, to the Business Observer last month. “You are definitely going to see some fallout because these alternative investment schemes were used as cash flow”.
Whatever the impact of the fallout in the alternative investment schemes is, it will definitely be exacerbated by a difficult local economic climate, ravaged by high inflation, and bracing for further external pressure as the global financial crisis heightens.
President of First Global Bank Wayne Wray told the Business Observer yesterday that his bank has also experienced an escalation in delinquent borrowers over the past several months but said that this had more to do with the strenuous economic climate than anything else.
“Yes, we have noticed that our customers are having difficulties honouring their monthly debt obligations based on falloff in business sales and income reduction,” said Wray. “We are in close touch with our customers to ensure that we provide the requisite financial advice through this difficult period.”
However, while the increase in bad debts is a concern, the development should not threaten the viability of any of the local-based financial institutions. The last time non-performing loans among financial institutions increased as much as this year was back in December 1997, increasing 96.5 per cent over 1996. Back then, non-performing loans were a third of total loans throughout the financial sector and this contributed to the collapse of many institutions. But up to June this year, non-performing loans made up about 2.5 per cent of total loans and additionally provisions were made for 95 per cent of these loans. .
