I was advised that the Guyana Bank for Trade & Industry Ltd (GBTI) is due to hold its Annual General Meeting for the year 2016 very soon. The shareholders of the bank should be concerned about the state of the loan provisioning net of recoveries at that institution. At the end of 2016, the provision for loan losses stood at $899 million. But to really understand the effect of what is happening, one must consider the ratio of the provision for loan losses net of recoveries to total loans and advances between 2012-16. From the graph below, one can observe the rapid expansion the pool of good cash that has to be set aside to fund the write-off of bad loans in the bank’s loan portfolio. In 2016, the ratio of cash being set aside for potential bad loans rose to some 1.98% of the total loan portfolio compared to under 0.39% in 2014. (see graph below). That is a five-fold expansion in this ratio.
But when we thought this risk resided only with just one bank, how wrong we were. The Bank of Guyana exposed a more systemic situation. If one is to observe the latest available quarterly report from the Bank of Guyana, as at September 2016, the non-performing loans (bad loans) were 11.3% of the total loan portfolio for the entire banking sector, compared to 6.6% in September 2014. That is almost a doubling of the bad loans to total loans across the entire banking sector.
What can one deduce from this situation? The quality of the loan portfolio at the commercial banks has rapidly deteriorated between 2014 and 2016. There are several reasons for this state of affairs, but at the top of the list is how badly the economy is being managed under Minister Winston Jordan. But the buck does not stop at Minister Jordan; after all he is a creature of a higher power. The people bestowed the responsibility for charting a course for the nation with President David Granger and cutting ribbons and receiving free boats is not what is needed; progressive public policies continuously is vitally essential at this stage of the nation’s evolution.
In the case of GBTI, pre-tax profit declined 6.25% over 2016 to $2.5 billion, resulting in that bank paying the GRA less in taxes. So as the economy implodes, we will find that more companies will be paying less tax as their dwindling profits, which redounds to the disadvantage of the nation.
The evidence reveals that GBTI will be paying the GRA some 30% less in taxes in 2016 compared to the previous year. If one is to further analyze the cash flow statement of GBTI, one will recognize also that there was a $2.4 billion decline in the loan portfolio in 2016, the principle revenue generator for that bank. From my reading of the fund flows, there appears to be an active strategy by the leadership of the bank to move its assets from loans to lower risk options as the economy contracts. This is known as a flight to quality in periods of grave economic uncertainty.
Those who have eyes are fully aware by now that what we are having in Guyana today is a full-fledged credit crunch. Overall, a credit crunch will do a lot of damage to the economy by stifling economic growth through decreases in capital liquidity and will reduce the ability of business houses to borrow if they choose to re-capitalize or even expand operations. When this happens, the entire nation loses and entrepreneurialism is crushed.
The year 2017 is shaping up to be the most challenging year of the Granger term so far; buckle-up. The time of austerity and belt-tightening is upon us.