Inflation could affect Barbadians’ ability to repay loans, says report

Local financial industry experts say the ability of Barbadians to repay their loans could be impacted by rising inflation due to the ongoing war in Ukraine.

Despite that increased risk of non-performing loans, however, regulators said stress test results suggest that “the financial sector is in a position to absorb large but plausible shocks to non-performing loans, profits and liquidity without the occurrence of systemic instability”.

“This improved large-exposure non-performing stress tests result compared to the previous year is again due to a reduction in some of the balances of the largest exposures and stronger capital positions,” said the recently released Financial Stability Report 2021.

It noted that individuals continued to account for the greatest level of credit exposure among the financial systems’ main lenders.

“The credit exposure of banks and finance and trust companies is heavily concentrated in the personal sector which accounts for 62 per cent of their loan portfolios and 68.2 per cent of total non-performing loans,” said the report.

It noted that with the COVID-19 pandemic seeming to wind down in its detrimental effect on the global and local economies, projections were for a rebound in the country’s main economic sectors.

However, the financial regulators said the threat of the impact of the conflict in the Ukraine on international and local commodity supplies and inflation has already started to impact Barbados and could impact the level of non-performing loans.

“Looking forward, this large proportion of personal borrowers will be affected by inflation arising from fuel and food prices. This could impact the level of non-performing loans over the coming months or years, depending on the war’s duration and intensity. Therefore, the stress testing of credit risk remains a critical tool in assessing potential risk in Barbados’ financial system,” said the document.

The total new lending for 2021 rose by 3.7 per cent, representing a recovery from the decline registered in 2020.

“With regained confidence in the economy, households and businesses, particularly the tourism and distribution sectors, increased their demand for bank credit,” the report said, adding that “within the business sector, new credit demanded in 2021 was primarily put towards working capital and refinancing”.

Even as loan balances were reduced, loans remained the largest component of commercial banks’ assets during the review period.

According to the 94-page document, the Central Bank of Barbados and the Financial Services Commission (FSC) will continue to strengthen the regulatory framework and improve the assessments of systemic risks.

“Among planned initiatives are for an improved focus and development of capability on climate risk evaluation, cyber risk security, anti-money laundering, and the monitoring of the non-regulated financial sector,” it stated. (MM)