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Barbados’ financial sector was able to weather the storm brought on by the COVID-19 pandemic and remain stable in 2020, but the year was not without its challenges. What were they? How was the sector able to overcome them? And what is being done to ensure the sector remains sound?
Senior Economist at the Central Bank of Barbados and head of its Financial Stability Unit, Carlon Walkes, reveals the biggest risk confronting the financial sector: “The key challenge is NPLs, non-performing loans. Those are loans that are late by at least 90 days.”
The financial hardship that COVID has created for some households led to an increase in NPLs for commercial banks (7.3 percent in 2020, as compared to 6.6 percent in 2019); credit unions (13.1 percent in 2020, as compared to 9.6 percent in 2019); and deposit-taking finance and trust companies (11.7 percent in 2020 as compared to 11.3 percent in 2019).
NPLs may increase further given the looming default risk, the possibility that a borrower will fail to make full and timely payments of principal and interest.
“I would say the default risk is pretty high because no one knows how long this pandemic is going to last… If things don’t turn around soon, the tourism industry won’t be able to grow in time for us to experience a pick-up in the near term. So that would be the major challenge at this point in time.”
To better manage the situation, financial institutions increased their provisioning – the setting aside of money to cover loans that go into default – to ensure that their overall operations are not destabilised. They also, early in the pandemic, instituted moratoria programmes, allowing their customers to defer loan payments and preventing these loans from being considered non-performing. According to the 2020 Financial Stability Report, a joint publication by the Central Bank and the Financial Services Commission (FSC), at its peak, loans under moratoria at commercial banks, the largest players in the financial sector, totalled $1.9 billion. However, by the end of the first quarter of 2021, that figure had dropped to $211.7 million.
Walkes explains that the Central Bank, in order to facilitate commercial banks and finance and trust companies, which it regulates (credit unions are regulated by the FSC), offered them liquidity support in the form of reduced security requirements for deposit liabilities.
The moratoria programmes offered by financial institutions were a temporary measure, says Walkes. “The moratoria are really to buy time for credit customers. You offer the moratoria with the hope that the situation improves for customers, so that they can begin to pay their debts.”
As these programmes have begun to expire, the Central Bank has been closely monitoring commercial banks and finance and trust companies to determine the pandemic’s longer-term fallout on borrowers.
“We need to pay special attention to the “special mention” category [of loans], which are not late by 90 days or more, but are late nonetheless, because those can potentially move to the non-performing segment of borrowers… We are monitoring the loans under moratoria and seeing how many are transitioning to non-performing and how many are going back to being in good and regular standing.”
This monitoring is critical as it will allow the Bank to identify any emerging issues and take measures to address them as it did in the initial months of the pandemic. By doing so, it can help to keep the financial sector stable.