Local financial industry experts say the ability of Barbadians to repay their loans could be affected by rising inflation due to the ongoing war in Ukraine.

However, despite that higher risk of non-performing loans, regulators said the stress test results suggest “the financial sector is in a position to absorb large but plausible shocks to non-performing loans, earnings and liquidity without causing systemic instability”.

“This improved large exposure stress test result compared to the prior year is again due to a reduction in some of the larger exposure balances and stronger capital positions,” the newly released report said. Financial Stability Report 2021.

He noted that individuals continued to represent the highest level of credit exposure among the main lenders in the financial systems.

“The credit exposure of banks and finance and trust companies is largely concentrated in the personal sector, which represents 62 percent of their loan portfolios and 68.2 percent of total non-performing loans,” said the report.

He noted that as the COVID-19 pandemic appears to be easing in its detrimental effect on global and local economies, projections point to a rebound in the country’s main economic sectors.

However, financial regulators said the threat of the Ukraine conflict’s impact on international and local commodity supplies and inflation has already started to affect Barbados and could affect the level of non-performing loans.

“Looking ahead, this large proportion of personal borrowers will be affected by inflation stemming from fuel and food prices. This could affect the level of non-performing loans in the coming months or years, depending on the duration and intensity of the war. Therefore, credit risk stress testing remains a critical tool for assessing potential risk in the Barbados financial system.

Total new loans for 2021 increased by 3.7%, representing a recovery from the decline recorded in 2020.

“With the recovery of confidence in the economy, households and businesses, in particular the tourism and distribution sectors, increased their demand for bank credit,” the report said, adding that “within the business sector, new credit demanded in 2021 was mainly used for working capital and refinancing.”

Even as loan balances shrank, loans remained the largest component of commercial bank assets during the review period.

According to the 94-page document, the Central Bank of Barbados and the Financial Services Commission (FSC) will continue to strengthen the regulatory framework and improve systemic risk assessments.

“Among the initiatives planned are an enhanced focus and capacity development in climate risk assessment, cyber risk security, anti-money laundering and monitoring of the unregulated financial sector,” he said. (MM)

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