The impact of the COVID-19 pandemic on the banking sector

The global economy took a turn for the worse at the beginning of 2020, just as the COVID-19 pandemic emerged. This pandemic has negatively impacted many lives across the world, and has had adverse direct and indirect impacts on the global economy.
The pandemic has caused many to either lose their jobs or work less hours, which impacted their earnings. This resulted in lower spending power for some, increased loans, increased credit payment terms, and a decline in demand for luxurious items for households. On the other hand, around the world, the business sectors took a hit that caused some of them to become bankrupt, putting many out of jobs with unsettled debts.
Studies have shown that this crisis resulted in the largest and fastest decline in international flows in modern history. There is a 13-32% decline in merchandise trade, a 30-40% reduction in foreign direct investment, and a 44-80% drop in international airline passengers in 2020. These numbers show a major push back of globalization’s recent gains.
In Guyana, the global health risk also poses a serious financial threat to the banking sector. In maintaining its commitment to safeguarding and strengthening the resilience of the financial sector, the Bank of Guyana has committed and implemented a series of measures, while collaborating with the Guyana Association of Bankers (GAB) to minimize the economic impact of the COVID-19 pandemic on Guyana’s entire financial system. The commercial banks in Guyana have agreed to provide general concessions in interest rates of 1% and up to 2% on customers loans below GYD10M until December 30,2020. With respect to the lending rates, the existing range is between 6.5% and 16%, which some commercial banks have agreed to provide special consideration during this period. Commercial banks of Guyana have also dropped ATM and merchant bank charges to facilitate more banking transactions, along with providing relief to the senior citizens. These banks have also agreed to provide short-term capital loans to businesses in need, so that they can maintain their obligations to pay staff, support daily operations, and keep the company afloat during the COVID-19 period.
According to the Bank of Guyana half-year report, as at June 2020, 15,641 facilities have benefited from the commercial banks’ relief measures. This accounted for $68.7 billion/ 26.7 per cent of the bank’s total loan portfolio for the period. The services sub sector received the biggest amount of relief, which amounted to $31.9 billion or 46.4 per cent of the total relief granted. Next in line for the highest relief sectors are the households and real estate sectors, with $22.8 billion (33.1 per cent) and G$6.4 billion (9.4 per cent) respectively.
Commercial banks RBL, GBTI and DBL accounted for the greatest contribution to the services sub-sector with 69.5 per cent, 16.9 per cent and 8.3 per cent respectively. Of the $22.8 billion relief granted to the household sector, BNS was responsible for 85.2 per cent ($17.2 billion). Of the $6.4 billion relief granted to the Real Estate Sector, RBL & CBI collectively contributed 98.9 per cent ($6.4 billion) of the relief.
With these unforeseen concessions put forward by the commercial banks along with the Bank of Guyana, the banks’ profitability would be affected. These banks would have to make provision for their expected losses on loans and investment portfolios.
Not too long ago, Republic Bank Ltd stated that they have experienced a decline in profits as at September 2020 compared to last year of US$101M or 42.8 per cent from US$235.9M. According to the Bank’s Chairman, this is due to a decrease in the economic activities, reduction in interest rate charges, along with the measures implemented by the Government in order to have the economy flowing again. RBL’s total asset is US$ billion (19.2 per cent/ US$2.5 billion more than 2019). However, the total dividends declined by 40 per cent from 2019 to US$65.6 million.
According to a stress test carried out by the Bank of Guyana, it is estimated that past-due loans could increase by 66 per cent while non-performing loans can increase by 18 per cent in a worst-case scenario of 100 per cent deterioration of the services, households and mortgages sector.
However, with efforts being made by the government to safely reopen the economy, coupled with the 2021 budget, Guyana is set to have a quick recovery and the banking sector can easily rebound post budget 2021 onwards. To this end, with the housing drive coming back on stream which will fuel a construction boom, this will also create demand in other sectors such as hardware distributors, businesses that supply building materials etc., will see an increase in demand with these projects. Not to mention the expected impact of the bigger transformational projects, and, the development impact as a result of capital inflows from foreign direct investments.

About the Author:

JC. Bhagwandin is an economic and financial analyst, lecturer and business & financial consultant. The views expressed are exclusively his own and do not necessarily represent those of this newspaper and the institutions he represents. For comments, send to [email protected]