NASSAU, BAHAMAS — The Central Bank’s decision to relax the current debt service ratio for personal loans from the 40-45 percent range to up to 50 percent is “unlikely” to have a huge impact on consumer lending retail bankers said yesterday, with one well-known executive noting that it was not the only criteria banks have to consider.
The regulator recently announced that it is relaxing the guidelines for domestic banks and credit unions regarding the qualification criteria for the provision of credit to the private sector. This move, it said, “takes account of the domestic economy’s increased capacity to sustainably absorb more credit expansion, given the potential for credit growth to stimulate greater imports and increase the net use of the foreign exchange. The favorable outlook for the external reserves is expected to be maintained. In particular, impact on credit growth is expected to be very moderate, given continued risks around the elevated average delinquency rate for private sector credit.”
The Central Bank continued: “Effective immediately, lending institutions may, on a case-by-case basis, approve applications for new personal loans, subject to the total debt service ratio for the facility and any pre-existing obligations not exceeding 50 percent. That is, unless stipulated regulatory requirements have been imposed by the Central Bank on specific banks or credit unions. This increases the total debt service ratio from the current range of 40 percent to 45 percent. The total debt service ratio is calculated as the sum of total monthly principal and interest payments divided by the total monthly income of the borrower or borrowers.”
Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Eyewitness News that the announcement, while welcomed, should be viewed in its proper context.
“From a credit risk management perspective it does not change a whole lot. It helps those who were on the margins and the debt service ratio was more of an arbitrary limit precluding them from securing financing,” he said.
“The debt service ratio was really just an artificial benchmark which served as a guiding light. As the Central Bank noted, banks will still have to look at it on a case-by-case basis. The Central Bank has relaxed these credit limits in the past during the aftermath of various hurricanes. They have relaxed the prudential norm and put greater responsibility on the banks, making the decision a purely risk management decision as opposed to blaming it on an artificial benchmark. I think it is unlikely to have a significant impact because a person’s creditworthiness is not solely centered around their debt service ratio. The debt service ratio indicates how much you are actually taking home and the intent behind it is to say that a person should not be taking on a level of debt which prohibits them from meeting their obligations,” said Bowe.
He added: “I think the Central Bank’s announcement needs to be looked at in its proper context. I believe that there is a view that the debt service ratio was established as a deterrent but the truth of the matter is that if a banking institution is willing to extend credit it will take into consideration a number of factors and the debt service ratio is merely one of them. In the grand scheme of things, you don’t really want to see high consumer lending and personal loans but loans which lead to greater productivity such as business loans and the development of property etc. What has happened should not be taken to mean that people can now simply borrow more and that way grow the economy.”
Kenrick Brathwaite, Bank of The Bahamas’ managing director told Eyewitness News it is “certainly significant” that the Central Bank has decided to take such a move, especially in the retail banking space.
“I’m just not sure what kind of impact it will have,” Brathwaite said.
“I believe it will have an impact but I’m not sure how significant it will be in the retail banking environment. The Central Bank has always said the highest percentage of retail lending is based on consolidations. Most of those persons getting a consolidation would have already breached a total debt service ratio of 50 percent. That is the biggest portion of retail lending as it stands today. So, I’m not sure how huge this would be to the retail banking environment. The fact that that they are doing this is a good sign for the lenders nonetheless.”
