Suspension period sees debt grow to nearly $2 billion in April 2020

The value of loans under moratoria at financial institutions in Barbados reached a high of $1.94 billion, spread across just over 67,000 accounts at the end of April last year, a month after the COVID-19 pandemic started to affect the island.

The 2020 Financial Stability Report indicated that at the time, the majority of those loans, $1.5 billion, were owed by individuals.

However, by the end of March this year, the total loans under moratoria were significantly reduced, with individuals accounting for only $10 million or close to five per cent.

“Given the opt-out approach adopted by some banks, at the end of April 2020, the value of loans under moratoria was its highest at $1.9 billion from 67,127 loan accounts, with individuals accounting for the largest share in both value and number of accounts at 77 per cent and 98 per cent, respectively,” the report said.

“Given the loan restructuring efforts of banks and an improvement in the domestic labour market since the first half of 2020, only $221.7 million remained under moratorium at the end of March 2021. Of this 221.7 million, 95 per cent were loans owed by non-financial corporations, mainly in the hospitality sector,” it added.

The report also revealed that at the end of December last year some 5,915 credit union members held loans under moratoria valued at around $241 million, with the majority (64.7 per cent) considered personal accounts.

“However, in terms of the total value of loans under moratoria, mortgages, personal and line of credit accounted for 55.5, 41 and 2.5 per cent, respectively. The credit union moratoria programme represented 13.5 per cent of the total value of loans owed to credit unions,” it said.

Meanwhile, the report revealed that the total value under moratoria by deposit-taking finance and trust companies peaked around June 2020 at 35.3 per cent of total loans.

The total number of loan accounts under moratoria for this category of financial institution was 4,342 at the end of June, before reaching 149 at the end of March this year.

The Financial Stability Report, which is prepared by the Central Bank of Barbados in collaboration with the Financial Services Commission (FSC) and the Barbados Deposit Insurance Corporation, said based on evidence globally, loan payment moratoria have proven to be a very useful financial stability tool “for abrupt crisis situations such as COVID-19”.

“However, it is critical that they are not used to mask deteriorating credit quality, as this could undermine financial stability over the medium-term,” it warned.

Barbados’ financial system remained stable and continued to grow during the reporting period, with commercial banks, which continue to dominate the sector, contributing the most to asset growth.

“Despite the COVID-19-related challenges, banks remained well capitalised and with substantial liquidity that will help them to cope with emerging risks. The capital insurance companies, life and general, also improved, partly because lower operating costs enhanced their profitability,” said the report.

While last year saw a general decline in credit card and other loan balances, mortgage lending to households continued to increase, with a modest growth in personal mortgages experienced by the credit union segment, and to a lesser extent, finance and trust companies.

Commercial banks recorded a marginal decline in mortgage lending for the year under review.

The report noted that there was evidence of rising non-performing loans, but the moratoria and loan restructuring measures contained them to levels that were “well below expectation”.

“To cushion potential negative effects on their balance sheets, banks increased their precautionary provisions on these loans without adverse effects on their capital adequacy. The pandemic has placed a new perspective on loan delinquency across the entire financial sector and new approaches to credit risk management of affected loans are needed,” the report explained.

It also stated that while stress tests suggest that even with extreme shock the system is still capable of withstanding substantial increases in non-performing loans associated with heightened credit risk, the Central Bank and the FSC will need to continue to monitor individual institutions.

The assets of the local financial sector – commercial banks, insurance companies, finance and trust companies, credit unions, mutual funds and pension funds – total around $25.6 billion at the end of 2020, which is 285 per cent of Barbados’ gross domestic product.

Commercial banks continued to dominate the financial system, accounting for just over $13.2 billion or 52 per cent of total financial assets in 2020. This is followed by insurance companies (15 per cent), credit union (11 per cent), while mutual funds and pension schemes accounted for nine per cent each of the asset share and finance and trust companies the remaining four per cent.

Within the commercial banking system, the three Canadian headquartered banks account for 73 per cent of total bank assets, while the two Trinidad and Tobago-based banks hold the remaining 27 per cent.

The assets of deposit-taking institutions continue to be concentrated in loans, especially credit to households, which accounted for 71 per cent of the sector’s total lending at the end of 2020, said the report.
(marlonmadden@barbadostoday.bb)