Bad debt costing millions in credit
Bad credit cost The Bahamas about $1.6 billion in available credit between 2009 and 2013, according to The Central Bank of The Bahamas (CBOB), which has circulated for public consultation a draft Credit Reporting Bill and Regulations – which call for the creation of a credit bureau.
In the context of discussing the need for a credit bureau, and the changes such an entity might entail , Guardian Business spoke with CBOB Governor Wendy Craigg about the cost of bad debt to the economy. Between 2009 and 2013, banks in The Bahamas wrote off about $463 million. During the same period, banks restructured loans valued at about $780 million. And the provisions – the amount of capital set aside against bad loans – were $442 million for the same period.
“This (figure) is only banks. You also have the Bahamas Development Bank, the Bahamas Mortgage Corporation and the credit unions who also have bad debt. So those figures are not included in (that number),” Craigg told Guardian Business.
For perspective, the value of loans restructured between 2009 and December 31, 2013 – nearly $780 million – represents 12.6% of available credit at year end 2013.
The bank notes that these are cumulative figures, which shift from time to time.
“(Bad debt) is using the banks’ resources that they could have to lend,” Craigg said. “So to the extent that banks have written off $463 million between 2009 and 2013 – they’ve written it off, they’ve not collected it, and whenever you write off, you write off against capital. That is capital that you have to lend…(and) if you’re drawing down on your capital, you’re endangering the health of the banking system, which could impact financial stability.
“We want to ensure that whatever happens in the system, all of these developments are aligned with the Central Bank’s objective of maintaining financial stability,” Craigg said.
In this context, the governor noted that a credit bureau will not necessarily restrict the amount of credit, but it will ensure that “the quality of the credit improves” due to the comprehensive nature of the information a credit bureau can supply a bank or other lender, on which they can then determine creditworthinesss.
“As it currently stands, they are making their credit decisions on incomplete information,” Craigg said. “What can happen in these circumstances is what is called ‘adverse selection,’ where you may be granting credit to persons who may not have the ability to repay the credit.
“So it could curtail the credit, but its certainly going to reduce considerably the riskiness of the credit process.”
The Bahamas’ Credit Bureau Project (the BCBP) was launched by the Central Bank in 2010, for the purpose of establishing a national credit reporting system in The Bahamas.
The Bank says in its public consultation document that a national credit reporting system should be supported by an appropriate legal and regulatory framework
“(The Bank) has, therefore, drafted the Credit Reporting Bill, 2014 and accompanying Credit Reporting Regulations, 2014 (attached to the consultation document). The Bank is now seeking public feedback on the draft Bill and Regulations.”
These drafts were prepared with support from the International Finance Corporation (IFC) as part of the technical assistance which the Bank is receiving under the IFC’s Caribbean Credit Bureau Project—which is a 5 (five) year project for credit bureau development in the English‐speaking Caribbean, funded by the Canadian International Development Agency (CIDA). The draft Bill and Regulations have gone through several revisions, following review by the Central Bank and the BCBP’s inter‐disciplinary Legal Working Group.