Non-performing loans a problem

NON-Performing Loans (NFL) are among the major concerns of the Barbados financial system following a stress test which was done on this country’s financial system.

Director of the Central Bank of Barbados’ Research and Economic Analysis Department (READ), Anton Belgrave, revealed this in an interview while outlining details of the test to ascertain the health of the financial system and find the weak points.

A non-performing loan is a loan in which the borrower is in default and having not made any repayments to the issuer to service the said loan over a specific number of months and usually a year.

Unemployment and recession are usually cited as the main reasons for the increasing incidence of non-performing loans.

In financial terms, a stress test is basically a simulation which looks at the strength of a country’s financial system in response to various economic shocks such as the COVID 19 pandemic, which has wrought significant setbacks on this country.

“We use the information to inform our discussions with the banks, the credit unions, insurance companies, to say we have found these issues and to query from them how they are going to address the issues,” Belgrave noted.

The Central Bank of Barbados economist explained that their  findings show that certain sectors are stronger than others, but that the system has held up so far in the face of the COVID-19 shock.

He said that under the test they looked at all of the deposit-taking financial institutions – banks, credit unions, what is called the part-three institutions and insurance companies.

Belgrave indicated also that these areas were chosen because of their importance.

According to him, in the first place if any of the entities making up those areas were to collapse, it would totally disrupt the national economy, and in the second instance, they would touch on the lives of a broad number of Barbadians if they fall into financial difficulties.

He explained that in conducting the stress test, they looked at basically credit risks and liquidity risks for the financial system as a whole, although there were other risk factors considered.

According to him, “the financial system is a flush with liquidity and there are no entities where liquidity is an issue.” However, the Economist pointed out that credit risks are a different matter in that some of the issues which arose as a result of the COVID shock were the focus of attention.

He stated that to date the banks and other institutions have dealt fairly well with the shocks although it is sizeable and they in the bank are still working through the potential increase in non-performing loans and what they imply for the health of the country’s financial system.