By Gitanjali Singh
President Bharrat Jagdeo yesterday declared that he had no intention of bailing out commercial banks from their $12 billion rice industry bad debt but said he was prepared to assist farmers and small players caught in the financial bind.
Stabroek News
August 24, 2001
"I am still studying the proposal [by the rice industry] and I am willing to help but there will be no bail out of the banks for bad lending," Jagdeo told reporters yesterday.
The President said he was more "sympathetic" towards the small farmers who were in difficulties as a result of their indebtedness to the banking sector. He indicated that if a portfolio of the loans to the rice sector was dissected, it would be found that most of the debt resided with the ten top borrowers in the rice sector.
Jagdeo said that if the way governments around the world have reacted to bail-out demands was examined, it would be seen that the governments start with small debtors.
The President indicated that if in the government's decision to help small farmers the banks were able to collect on their debts and improve their balance sheet position, then that was all and well. However, he stated categorically that he was not in the business of bailing out banks.
The Guyana Association of Bankers, an advisory body to commercial banks, was prepared to recommend to its members that they write off $8 billion of the rice sector's indebtedness ($5 billion in interest and $3 billion in principal) if the government bought over $9 billion of the principal.
The outstanding principal of the rice sector debt is $12 billion, for which $6 billion was provided for. Under the Financial Institutions Act, interest cannot be charged on accounts which have gone bad and had to be provided for. So in effect, the banking sector's proposal would have seen a $3 billion write off by the sector.
However, the sector expected to benefit from a write back of $3 billion through the proposal, as if the government took over $9 billion of the debt, the provision of $6 billion would surpass the amount to be written off by $3 billion. The banks wanted the government to waive taxes on this amount being written back onto its books.
The government was also being asked to float a government-guaranteed bond offering ten per cent interest to raise $9 billion to buy the rice sector debt from the banking system for which $20 billion in security was held. It was also being asked to reschedule the loans of the rice sector over a longer period at an interest rate of 5.5 per cent per annum, as against the 19 per cent at which the loans were made.
However, a senior government official has indicated that the banking sector would not be adversely affected if it had to write off the entire amount and noted that there was a price for lending in an imprudent manner.
Additionally, the official said that the rice industry had to find innovative means of getting out of its indebtedness.
The rice industry, like other industries in the export of primary commodities, had been hard hit by depressed prices on the world market and disappearing preferential arrangements.
It has been pinning its hopes on a possible government bail-out but Jagdeo has made it clear on several occasions in the past that he was only interested in helping the small farmers and not large players in the industry. He had earlier stated that if larger players were phased out of the market, emerging entrepreneurs or even foreign players in the market would replace them if capital was the issue.
The most recent bail-out proposal painted an optimistic picture for the recovery of the rice industry by next year-end. It was prepared by the rice committee appointed by Jagdeo to come up with answers to the problems facing the industry..
Jagdeo is expected to meet the rice committee this week for discussions.