Fast escalating non-performing loans could potentially impact financial and economic stability – Association of Banks

The Chairman of the Association of Banks in Fiji, Rakesh Ram says the key concern for the banks at the moment is the fast escalating non-performing loans that could potentially impact the financial and economic stability, a serious issue which was also recently highlighted by the Reserve Bank of Fiji.

Ram says if loans given by banks are not paid back by borrowers in the time and conditions agreed to, they become non-performing and Ram has warned that when a bank fails due to very high levels of non-performing loans, and losses not mitigated adequately through provisioning, and additional capital, the stability of the financial system is weakened which can lead to a financial crisis.

He stresses that liquidity is not the only factor that determines the interest rate in the market although it helps individual banks to determine rates offered to their customers.

Ram says maintaining the safety and soundness of individual financial institutions like banks, and the stability of the overall financial system is crucial in the current challenging environment.

He confirms about $3.3 billion loan deferment has been provided by banks as at 30th June this year, even at a best case scenario of 10 percent default rate, it will result in $330 million of additional provision for doubtful debt. The Chairman of the Association of Banks adds that despite the concerns around escalating bad debts, banks will continue to support customers during these difficult times through various options of loan deferments on a case by case basis, interest rate reductions, restructure of debt, working capital requirements and will continue to assess new lending proposals based on their credit criteria.

Meanwhile, the National Secretary of the Fiji Bank and Finance Sector Employees Union, Sailesh Naidu says they are calling on banks to consider a reduction in lending rates including commercial and personal loans as recent comments by the Minister for Economy and the Governor of the Reserve Bank of Fiji indicate a high level of liquidity in the banking system.

Naidu further says that by reducing the interest rate to micro, small and medium enterprises, the banks will be able to assist in rejuvenating economic growth causing a positive spillover in generating economic activity and employment.

He goes on to say that banks in recent years have focused more on tourism and real estate and as a result have also enjoyed a high level of after-tax profit in recent years.

Naidu says with the recent crises and the downturn in tourism and real estate sector, banks need to re-direct their focus on agriculture, sugar, forestry and fisheries and other export-oriented industries to stabilise the inflow of cash in the Fijian economy.