Interest forgiveness not likely

Bank customers hoping to get away from paying accumulated interest on their loans because of the moratoria offered in light of the COVID-19 pandemic can forget about it.

However, Governor of the Central Bank Cleviston Haynes has hinted that he would be meeting with commercial banks to see if a special interest rate could be applied in such circumstances.

“It is something that we will discuss with the banking system. But I think there has to be a sort of understanding of how the system works as we go forward. I don’t think we will get a situation where we automatically say there will be no additional interest as a result of the moratoria,” said Haynes.

“The question really is, what interest rate perhaps would apply in those circumstances, although generally interest rates are relatively low,” he said.

At the beginning of April, commercial banks announced that they were giving customers moratoria on outstanding credit such as mortgages and loans. It was initially offered for three months, with some indicating a possible extension due to the ongoing effects of the pandemic.

Delivering his half year economic review on Wednesday, Haynes reported that the financial sector remained stable and the banking system was still well capitalized. However, he said, there was a “modest increase” in non-performing loans.

Haynes said: “Some corporates and households availed themselves of the moratoria on loans offered by lending institutions, some of which increased their provisions in the event of a worsening of credit quality post the moratoria.”

Close to 70,000 accounts, a mixture of individuals and corporate, were subjected to the moratoria in April, and that number had fallen to just about 55,000 by the end of June, Haynes reported.

He said some financial institutions have already increased their provisions so that if a worse case scenario of “bad loans” was presented, they would have the capital buffers to continue their operations.

“What is going to be important going forward is that financial institutions will have to work with their customers in order to be able to manage any sort of a risk to their balance sheet,” he said.

“So where we are right now I am comfortable that we can manage the situation, but as always it is a case of persons being able to come into your bank early if you have any difficulty so you can discuss with your bank what the situation is and be able to work out a plan to be able to resolve that situation. That is going to be critical for individuals and firms as we go forward,” he explained.

He acknowledged that some financial institutions had already indicated a possible extension of moratoria, but added “it would have to be done in the context of the economic development”.

“Persons have to recognise that it is not a panacea for your private debt management. You always have to take that into account that there are additional costs that are incurred even when you have the moratoria. So it is not just the impact it has on the financial institution but also the impact it may have on the individual,” he said.

Haynes reported that the financial system continued to record high levels of liquidity, with the excess cash ratio for banks rising from 18.5 per cent to 20.1 per cent at the end of June.

Interest rates remained relatively stable, he said, adding that Barbados dollar deposits grew slowly during the first six months of the year when compared to the same period last year.

“Households, non-financial private corporations and public sector entities were the main drivers of domestic currency deposit growth,” he said.

“Foreign currency deposits also increased, partly on the strength of private sector foreign investment flows during the first quarter of the year,” he added.

Haynes also reported that for the third consecutive year, credit to the non-financial private sector by deposit-taking institutions declined during the review period, falling by 1.5 per cent as loan repayments by the personal, distribution, hotels and restaurants, manufacturing, construction, real estate and health care sectors outweighed new credit.

The governor also addressed the issue of fees, saying based on his discussions with the banks “they are sensitive to the fact that this issue of fees is troubling Barbadians at all levels”, but he said the Central Bank had no intention of putting a cap on all fees.

He said he was hoping the publishing of some bank fees would help to bring some discipline to the whole issues of fees-setting in the financial system.

“There are some fees that we have agreed with the bank that should not exceed a certain amount . . . In some cases they should be zero and some cases it should not exceed the threshold. I don’t think at this point we should try to put a cap on all fees. One of the things about price controls generally, is that as you try to put price control on one thing something else opens up that has unintended consequences,” he explained. marlonmadden@barbadostoday.bb