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BATT head says no credit bubble in T&T

Sunday, August 10, 2014
Darryl White managing director of RBC T&T and president of the Bankers Association

Newly elected president of the Bankers Association of T&T and managing director of RAB T&T, Darryl White, has presented a good news/bad news scenario when coming to Trinbagonians, credit and their ability to make good on their loans. The bad news is that conditions are ripe for a credit bubble to occur in T&T. Nonetheless, White said there were measures in place to prevent it from happening.

According to White, the fact that regulatory oversight was being extended to credit unions and some other financial institutions would keep T&T from a softening of credit standards. White was responding to a similar question the Sunday BG posed some months ago to deputy Central Bank Governor, Alvin Hilaire. Then, the deputy governor had said there was little cause for alarm, because a key indicator of a possible problem with credit, the number of non-performing loans across several sectors, was around 4.0 per cent.

This concurred with the BATT president’s own findings, who quoted delinquency statistics for retail lending at the RBC as being in the low single digits. “Our delinquency on the retail book is less than three per cent,” said White. He also noted most consumer borrowing was for the purchase of assets, such as mortgages for homes. He reasoned that mortgages were up, because there were few other hard assets for people to put their money into.

“People have been borrowing to either upgrade or improve their homes or to have a home for the first time. So the mortgage market has been the most bouyant of all the sectors. Auto finance has also been pretty strong. The consumer loan area, which is the area of pure retail credit, is actually the one that is the flattest. There really isn’t a huge amount of growth in that sector.” 

However, referring to information coming out of conversations with the IMF, the BATT president said a credit bubble was not entirely out of the realm of possibility.

“Yes, the conditions are there. I would say the key things are high liquidity, low interest rates and, additionally, you have a dollar that doesn’t give you many options. You have what we call a liquidity trap; we can only do things in TT dollars in T&T. So those are good conditions to create a bubble in credit products, because people can borrow for many reasons and people can borrow for things that are not productive.”

White said it was important, though, that stakeholders were aware of the potential for the formation of bubbles and have been taking steps to deal with it.

RBC loan portfolio
White told the Sunday BG that in terms of extending credit, the RBC was an equal opportunity lender. “I would say we are roughly even across all the sectors. Our credit book is roughly evenly spread. It is three sectors: the corporate/business, the government and the retail sector. Some banks will say they are more retail, some banks will say they are more corporate. We are spread right across the spectrum.”

Sunday BG e-mailed the Bankers’ Association secretariat to find out what was the rate of non-performing loans at the other banks within the industry. The secretariat indicated that the information was considered “competitively sensitive” and that we would be unable to obtain it.

Anecdote vs the evidence
The RBC managing director was also asked about the possibility of gap between what level of debt people were experiencing and what statistical evidence was actually showing. White said while he recognised that people often talked about debt, the facts were, in terms of numbers, the evidence was not there. He also said in addition to looking at delinquency rates, the level of savings and investments should be studied.

“One of the statistics that I would challenge people to look at is how much saving is taking place and how much investment. And I think a fair amount of savings and investment is taking place.”

Regulatory framework
On the many options for consumers to access credit in T&T, particularly in the low interest rate, high liquidity environment, White said: “All that ends up creating is a wide range of credit products that the market could get. They can get it through hire purchase, they can get it through a hire purchase arrangement, and that can go anywhere from cars, fridges to furniture or whatever. 

You can get it through credit unions; you can get it through your non-bank financial institution. You can get it through an insurance company; you can get it through the banking system. All of that and you are not even talking about credit from the neighbourhood store. So, you have this abundance of credit products and options outside there.” 

He said the good thing here was that steps were being taken to regulate more of the non-banking financial sector, and there were also more checks and balances to keep credit consumers on the straight and narrow. 

“Certain things, institutionally, work well for us. For example, we have a strong regulatory framework and we are strengthening it by bringing credit unions into that framework. We now have a credit scoring systems in Trinidad and we have a credit bureau. That is very important. It is more difficult. There are people who get turned down because they have a telephone bill outstanding. Sometimes that’s a little harsh but it (the system) tracks to that extent. So we do have the elements that enforce, create a credit discipline.”

Banks, he said, are being so cautious where lending is concerned that the RBC managing director was worried that his bank was saying no to people who they should be saying yes to. Referring to the RBC’s three per cent delinquency on retail lending, White said: “That is so low we end up asking ourselves: are we turning away good business? When the delinquency rate is too low, that is the flip side of the coin.”

In fact, the BATT president said increasing the number of loans on the books was a good way for banks to guard against delinquencies. “If I have a larger book, that means, when things go bad, I have more assets to protect me. I can protect against delinquency by growing my business. So if I have the same amount of delinquency, let’s say I have $200 million out of $2 billion That is 10 per cent. If I keep that $200 million and I go up to $2.5 billion. It is less.”

White also said, balanced with the institutional protections, many people brought their own sense of personal responsibility when coming to handling their borrowing. But while the BATT president said there was no weakening of the quality of credit offered by most of the financial sector, he said, there were pockets that, for all intents and purposes, operated like financial institutions that could not be regulated by current legislation.

“I have to careful how I say it, because we have a wide financial institution sector. There are entities that do hire purchase, that function like a financial institution. Even though they may sell furniture and appliances and these types of things, they lend, effectively. Are they as rigorous? Bear in mind that the only reason they are not regulated by the Financial Institutions Act is that they do not take deposits.”

Like the deputy Central Bank governor said some months ago, White said the corporate/business sector presented more problems to financial institutions than consumer/retail. According to White, not only was business slower to borrow, they were also more likely to be delinquent. He blamed 2008’s global meltdown. “Businesses have not been as aggressive in terms of growth prospects. They are not seeking to grow as much, so they are not borrowing as much.”

Still, he said, the situation is improving. In recent years past, business confidence was benign. White said, this business confidence has been upgraded moderate.

Confidence and US currency shortage
The senior banker said business credit was not the only area the lack of confidence and the high liquidity/low interest rate environment was affecting. When asked if this lack of confidence could be connected with the ongoing shortfalls in the availability of US currency, White said it could be. He explained that the high liquidity, low interest rate environment caused the TT dollar to lose value quickly.

“If you look at your real rates, you lose money literally. You are having negative returns all the time if you leave your money in a bank and you don’t invest it. On the flip side, you have this whole world and universe of things that you can do with US dollars that you cannot do with TT dollars. So I think some of it is undeniably capital flight.” White also observed that while individuals were demanding US dollars, the business community was, by far, the largest consumer of the commodity. Taken altogether, this would create heightened demand.

“If everybody wants all of it at the same time, you are never really going to meet that demand properly.” However, in his opinion, the continuing rise in demand was out of line with the type of consumption done by consumers and businesses. 

“We are consuming more in T&T. We are consuming more luxury-type items and obviously the cost of that will also drives things up. But it is not in line with the type of demand for foreign currency. You can’t see the demand for foreign currency going up by a US$ billion a year, every year. And I think some of it is underground, you can’t deny that. That takes place. Money is moving out, because it doesn’t want to be here.” When asked to, White chose not elaborate further on this point.


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