Jamaican banks pumped up their loan portfolios by nearly 60 per cent in the two years to last December, but their dodgy debts jumped a staggering 80 per cent, to approximately $9.8 billion, a new central bank report shows.

However, the problem of borrowers' failure, or inability to service their loans, clearly worsened over the past year, spiralling by 56.6 per cent, indicative, analysts say, of the island's deepening economic problems, triggered in part by the global credit crisis and recession.

"We are not immune from the global crisis," said Christopher Zacca, the president of the Private Sector Organisation of Jamaica (PSOJ). "Businesses are facing reduction in consumption and sales while, on the other hand, interest rates have gone up."

Zacca, the deputy chairman of Gordon 'Butch' Stewart's privately-held ATL Group, added: "As businesses are faced with high interest rates and less revenue, then there will be a tendency for them to have a difficult time paying their debt."

Outstanding loans

The central bank's global numbers on dodgy debts, business leaders suggested, likely masked the scale of the problem, especially among small firms and households, that will most probably be the ones unable to service bank loans.

Bankers declined to comment on their portfolios and the central bank said it did not normally disclose the numbers and kinds of accounts in arrears.

According to the Bank of Jamaica's latest figures, up to December 31, the banking system - commercial banks, merchant/ investment banks, and building societies - had gross outstanding loans of $333.08 billion, up $64.8 billion, or 24 per cent on the previous year. In 2007, the gross expansion in banking sector loans was $59.9 billion, or 28.7 per cent, to $268.27 billion.

However, in the period from the end of 2006, when outstanding loans stood at $208.372 billion, to the end of December 2008, the amount of money these financial institutions loaned out increased $124.7 billion, or 59.85 per cent.

Expectedly, the bulk of this growth came from commercial banks, whose outstanding loans - at $246.16 billion at the end of December - increased by $92.71 billion, or 60.42 per cent over the three years. Approximately $51 billion of that rise was in 2008, representing a 26.1 per cent rise over the previous year, when loans rose at the marginally faster rate of 27.1 per cent.

Bad debt growing

Over the corresponding two years, building societies grew their loans, in gross terms, by $$32.32 billion, or approximately 78 per cent.

On the other hand, loans by merchant/investment banks, declined over the period by $3.78 billion or three-and-a-half per cent, to $10.71 billion. The big retreat by these institutions, however, was last year when they dropped nearly $3.4 billion or 24 per cent from their loan portfolios.

However, as the loan portfolio of the banks grew, so did their bad debts, as measured by loans that were not current for at least three months.

At the end of December, the banking system's non-current loans stood at $9.785 billion, or 2.9 per cent of total loans. At the end of December 2006, non-performing loans were $5.438 billion, meaning that bad debts grew by $4.347 billion or 79.93 per cent over the two years.

Of particular significance, however, was the movement in the ratio of bad debts to total loans of the institutions. At the end of 2006, non-performing loans represented 2.6 per cent of all loans.

The following year, although non-performing loans increased by $770 million, or 14 per cent, to $6.2 billion, they declined to 2.3 per cent of all loans. Last year, however, non-performing loans were 2.93 per cent of all loans.

Non-performing loans

"It (the growth in non-performing loans) is not really surprising based on the feedback I have been getting from members," said Milton Samuda, the president of the Jamaica Chamber of Commerce (JCC). "Further, given the economic conditions it is likely that people will find it more challenging to service loans."

Added Edward Chin Mook, the president of the Small Business Association of Jamaica: "It does not spell well for the economy and it serves as a wake-up call for business to become more innovative and to look at how to become more efficient."

The JCC's Samuda suggested that, in these 'extraordinary times', banks and their customers needed to be "far more understanding" to each other.

lowering urgency

The PSOJ's Zacca, however, stressed the urgency for the central bank's lowering of its bench mark rates, which have pushed well past 20 per cent in recent months as the authorities moved to ease pressure on the Jamaica dollar and head off inflation.

Inflation for the last calendar year rose by just under 17 per cent, but with consumer prices dipping 0.3 per cent in January, and seemingly likely to close around the Government's revised target of 14 per cent for the fiscal year, analysts hope that the circumstances are falling into place for a lowering of interest rates.

Zacca argued that the Government's monetary policies and fiscal measures have to be underpinned by strategies to drive exports and to earn foreign exchange so as to bring stability to the foreign exchange market.

"Strong measures need to be taken to reduce cost and there has to be a focus on growing areas of operations that can earn foreign exchange,'' he said.

SOURCE: Financial Gleaner, Friday, March 20, 2009