The relatively new practice of banks approving unsecured loans is now leading to challenges in the banking industry, resulting in banks losing profitability, Bahamas Clearing Banks Association (BCBA) President Kenrick Brathwaite said.
In Brathwaite’s view, local banks have distorted the lending patterns of Bahamians, allowing for unsecured credit facilities which often are difficult to recoup.
“The lending pattern of Bahamians when I was a young banker was, you get a small loan or a car loan and then you get a mortgage. But we’ve put that piece in there where we’re giving 25-year-olds $50,000, $60,000, $70,000 unsecured. And that is where the challenges are coming from now with these unsecured loans,” he said.
“I can do anything if you have security. If it’s a mortgage on your house, I can save your house or do what I like with that. I can give you forbearance for a year because the collateral is still intact. When we talk about unsecured credit, that’s a completely different animal. And the way that we deal with it sometimes isn’t even dictated by us, because it’s dictated by Central Bank regulations, which says to us that when you talk about provisions – and I’m sure you would have seen the reports about the profitability of all of these banks over the last six months – that happened because of the major cost in our provisions for all of these loans.
“So if all of these loans are on the books and you’re not receiving payments, say you now have to make account for this in your provisions. And now the provision costs will increase. And that’s why you see a lot of the banks’ profitability was reduced.”
Brathwaite was referring to the most recent Central Bank of The Bahamas Quarterly Economic Review, which showed that during the first quarter of 2020, banks’ overall profitability contracted by $59.3 million or 70.7 percent compared to the same quarter of 2019.
The Central Bank noted this was led by a significant increase in provisions for bad debt in anticipation of eventual COVID-19 losses.
Looking ahead, Brathwaite said he doesn’t see banks changing their lending patterns.
“Honestly, I don’t think so. Banks have various strategies in terms of their growth,” he said.