Letters

Commercial banks must do more

Dear Editor,

 The COVID-19 pandemic has led to the sudden closure of many local businesses and the drying up of income for thousands of families.

Every single business, large, medium and small, is caught up in a Category 5 financial hurricane that has been unleashed by the COVID-19 pandemic. It is crystal clear that we are in a financial crisis and that the government must adopt a war-time mentality and flex its muscles by intervening in the economy in unprecedented ways.

An example of this emergency intervention can be seen in the Central Bank’s latest move to prohibit foreign banks exporting banking dividends to their home countries in this hour of national crisis. Commercial banks operating very profitably in The Bahamas could hardly complain about this temporary restriction.

The banks are of central importance in our financial and monetary system. It is safe to say that our tax structure and general financial, political and economic stability has enabled these foreign banks to thrive and reap enormous profits in The Bahamas.

No one can seriously argue that commercial banks operating locally are heavily taxed or overly regulated. They provide a wide range of services linked to their customers’ financial affairs, including personal consumer loans, mortgages, credit card financing facilities, overdraft facilities, money transmission services, and investment management and advice.

These banks can consistently boast of very lucrative dividends for their wealthy shareholders, while exporting huge profits to their home territories over many decades. We all know that banks are in business to turn a profit. They generally aim to keep the total risk exposure of their assets as low as possible. All banks run the risk of default and must make provision for bad loans.

But, in most cases, if banks are faced with a particular risk of default, they usually require security against moneys advanced, for example, by taking a first charge on the borrower’s assets. The risk of people failing to repay their loans has a direct impact on the rate of interest charged on consumer and business loans.

The whole subject of interest rates and how they are calculated is an area that the government may wish to revisit at a more opportune time in the future. There are, often, more coercive courses of action open to the government where banks are guilty of charging predatory interests rates. Enough said.

A massive loan guarantee scheme is urgently needed to rescue large, medium and small businesses, and to keep families afloat in the present financial crisis.

Commercial banks, in a spirit of co-operation with the government and their thousands of customers, should immediately make available a fund to assist businesses, particularly those who demonstrated evidence of solvency before the COVID-19 pandemic, as long as those businesses can show that the pandemic has had a negative impact on their businesses.

This massive injection of liquidity into the economy by the commercial banks will be backed or guaranteed by the government. The loans can be administered through the commercial banks themselves at reasonable (not predatory!) interest rates, in partnership with the Small Business Development Centre (SBDC), unions and private sector businesses and the National Insurance Board.

The SBDC and the commercial banks, working together, can quickly identify and fund businesses, and by extension, thousands of families in need of emergency assistance. The government has already allocated about $20 million for the SBDC program.

It has the contacts in the community and already has an idea of the needs that exist. Maybe the commercial banks could add additional financial resources to the SBDC allocation. Just a thought.

In the case of individual loans or loans to households, the government may wish to guarantee up to 70 percent of those loans, for example. Let’s make an emergency loan available to each household, with minimal qualifying conditions.

Such a loan may also prevent those who rent from facing the very real prospect of being evicted from their homes due to non-payment of rent. This is quite apart from the recent government announcement of a three-month ban on evictions, so long as tenants are able to cover 60 percent of their rent.

Commercial banks should move immediately to introduce real interest rate relief schemes. There is no justifiable reason for them to insist on charging the same rates on mortgages, personal and credit card loans, in this time of national crisis. It’s absurd!

A three-month deferral on mortgage payments is simply not good enough. Given the nature of the health crisis and the financial difficulties facing the public, this period should be extended until at least the end of this year, if necessary.

The banks should be flexible enough to change interest rates in response to national crises of the kind we are now facing. In normal times of relative economic prosperity, persons and companies are expected to pay the prevailing interest rates.

Different borrowers have different financial requirements.

Borrower B, with a high rate of savings, may be in a position to resume regular mortgage payments after the three month period. But borrowers C and D, with a lower level of savings, may be unable to continue with mortgage payments after three months, particularly at the same interest rate. The job market is particularly vulnerable and uncertain for the foreseeable future.

I call on the commercial banks to extend the three month period as it relates to mortgage payments, and to move immediately to cut their interest rates. If they fail to do so, then the government should use its emergency powers to force them to do so. It’s as simple as that!

Quite frankly, this is not the sort of behavior one would expect from the commercial banks who continue to reap huge profits in this jurisdiction. We understand that these are uncertain times and that they want to reduce risks associated with bad loans, of which there is more than enough evidence.

But, in this crisis, it is clearly the time for a publicly underwritten loan guarantee scheme, with input from commercial banks. At a time of national emergency, it is not unfair to ask that commercial banks retain some of the risks associated with a national, government backed emergency loan guarantee scheme. It is their duty as good corporate citizens.

In an editorial entitled “COVID-19’s fiscal cliff,” in the Wednesday, April 29 edition of The Nassau Guardian, it was wisely observed in part: “In response to the pandemic, lending institutions, utility and other service providers have offered three-month deferral programs, which have provided residents some breathing room, but these payments have not been frozen or waived and when due, many who may still be without work, will find it difficult, if not impossible, to pay.”

I agree entirely.

In my view, the enthusiasm of the commercial banks has been strangely absent in the midst of this financial storm. Have we been abandoned by these financial barons? Must we bear the burden of this heavy cross all alone?

Only time will tell.

 

Mark Symonette-Rolle, LLB, LLM

 

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