The Financial Institutions Act - Help or Hindrance? Business Page By Christopher Ram Stabroek News December 5, 1999 Introduction The Financial Institutions Act of 1995 was put in place by Bank Of Guyana as a means of providing oversight over banks operating in Guyana. At the time of its implementation the economy of the country was performing extremely well with growth rates in excess of 6%. Businesses were booming, capital was more readily available and banks' profitability was soaring. Moratorium Banks were given a four year moratorium by which compliance was gradually phased in. Unfortunately the moratorium has expired at a time when conditions have changed significantly and all of these indicators have now shown a reversal. For years the banks have argued that the FIA requirements have been too stringent and have had an adverse impact on their profitability and overall financial condition. Indeed some bankers have argued that the strict application of Supervision Guideline No. 5 which deals with provisioning for doubtful loans and overdrafts exacerbates the situation. They are in fact calling for a softening of this Guideline to prevent an erosion of their banks' asset bases thereby threatening their viability. Banking Crises We have heard about international banking crises and the tendency is to believe that Guyana is immune from occurrences of this nature. By and large the banking sector has done enough to reinforce this view but this does not mean that provision should not be made against any eventualities that could arise. Business Page believes that some form of regulatory measures is necessary to protect the public interest. The question however is whether the banks do indeed have a valid case. Review Any legislation should be reviewed after a period of its existence in order to ascertain whether improvements could be made. This is especially necessary in the environment of rapid change that is being experienced by financial markets worldwide. The Financial Institutions Act has arrived at the point at which a review is necessary. The first issue that arises is the application, especially when the view of the auditors of the bank may be to err on the side of caution since they are required to ensure that the banks are in strict compliance. This approach has resulted in some disagreement over the classification of certain loans which while on the surface may appear to be a problem may have redeeming qualities which application of the Guideline ignores. Conclusion Of course the other side of the coin is that bankers must always be optimistic about and defensive of loans they have granted. This often leads to reluctance to accept that a loan must be written off even when all indicators point in that direction. The institution of the FIA has done a lot to address this problem. Where the FIA appears to be deficient is that there seems to be no real enforcement in the area of the appointment of bank directors. The requirement of the Act that a person must meet the "fit and proper" test appears not to be applied as it was intended. There are a number of thorny issues that have been created by the FIA and the time has come for dialogue between Bank Of Guyana and the banking sector to address them. This will ensure that there is consistency of application of the Act and would eliminate any real or perceived competitive disadvantages faced by the sector from quasi financial institutions. On the Line - Accounts for the year 1999 - National Bank of Industry & Commerce The financial performance of the National Bank of Industry & Commerce has partially recovered from the setback of the year before when profits took a dive from the high levels achieved during the years 1995 to 1997. According to the Annual Report circulated to shareholders profit after tax increased by a healthy 78% from G$125Mn in 1998 to G$222Mn in 1999. The Bank has once again demonstrated its excellent financial reporting system by having its financial statements audited within two weeks of the end of its accounting year of September 30. This is a tremendous achievement and reflects favourably on all those involved in the process. The following summary of the earnings of the Bank is reproduced from the Report: 1998 Change ...................................................................G$Mn ..................G$Mn ...........% Operating Income ....................................4031 ......................3463 .............16 Operating Expense ..................................3688 ......................3206 .............15 Net Income before Taxation ...................343 ........................258 ...............33 Taxation ...................................................121 ........................133 ................-9 Net Income after Taxation ......................222 .......................125 ................77 The growth in revenues was driven largely by a 22% increase in interest income from loans and advances, an 11% increase in investment income and a 4% increase in income from foreign exchange. The increase in interest income almost identically matched the growth in Loans and Advances which gives the Bank a 37% share of the market. The increase in investment income was achieved despite a significant decrease in Bank's portfolio of securities and investments, from G$7.7Bn to G$6.7Bn. There was a very pronounced decline in the holdings of Treasury Bills from G$5.7Bn in 1998 to G$4.1Bn in 1999 but this was partly compensated for by an increase in Investments in Local and Foreign Entities at cost from G$0.536Mn to G$1.208Mn. There are no details of this in the statements. Operating Expense is made up of Interest paid G$2,072Mn, Loan losses (net) G$475Mn and other non-interest expenses G$1,141Mn. Interest payments reflected an increase of 17.6% over the previous year whilst deposits increased by a more modest 5%. Savings deposits actually fell during the year from G$16.6Mn in 1998 to G$15.7Mn in 1999. This was however was compensated for by increases in Demand Deposits (current accounts) and Fixed and Term deposits. Once again foreign exchange transactions contributed substantially to the Bank's profitability earning G$300Mn in 1999 marginally up from the G$289Mn in 1998. It is perhaps worth noting that the amount earned on foreign exchange transactions was almost 30% of the net interest income after net loan losses. Loan losses net of recoveries increased by 15% from G$423Mn to G$485Mn. The Financial Institutions Act 1995 have set out some very stringent rules for provisioning against loan losses and these are depressing the reported income of the financial institutions. The Managing Director identified the adverse impact of the domestic economic environment as a contributory factor for these additional provisions which cumulatively account for G$1.1Bn.or 6% of loans and advances. Non-accrual loans amount to G$4.4Bn out of a portfolio of G$19Bn or 23%. A non-accrual loan is a credit facility which has been in default for three months or more and under Guideline 5 published under the FIA the financial institution cannot take up any interest thereon. The Bank is confident that a significant portion of the non-accrual loans is fully collectible. Despite the significant increase in pre-tax income (33%), the tax charge fell by 9% partly accounting for the correspondingly larger after-tax income. Earnings per unit of stock (for practical purposes the same as shares) was $0.74 compared with $0.42 the previous year. The amount paid out in the form of dividends was $0.40 per share. Under the Companies Act 1991 the par value concept of shares has been abolished and dividends are no longer computed as a percent of the par value. The attractiveness of the dividend has to be measured by reference to the market value of the stock but this information itself is not so easily available. The Report refers to the removal of the 2% yield cap on Treasury Bills and the lowering of the Reserve requirement from 14% and 16% of Time and Demand Liabilities respectively, to 12% flat. This has been one of the major complaints of the commercial banks and has been used as a principal reason for their wide interest spreads. No doubt the Government will be watching with interest to see how the banks respond to its initiative. Conclusion The Bank must be reasonably satisfied with its performance in a year which according to Chairman Ashton Chase was another challenging one for the Bank. The current year is an exciting one for the Bank as it completes one of the most modern offices in Guyana. The Bank has overcome the negative publicity over the privatisation and appears ready to face up to the challenges that lie ahead. It seems clear that the Bank is not complacent about its leadership role and is pursuing a strategy designed to widen the gap with its competitors. A © page from: Guyana: Land of Six Peoples