EARLY projections indicate that the financial sector is expected to buckle under higher non-performing loans, as the haemorrhaging from COVID-19 is expected to escalate.

The projections done by the international auditing and management firm of KPMG, under the heading ‘Credit Risk Implications of COVID-19 Crisis’, estimate that non-performing loans could rise as high as 9.5 per cent, and 4.0 per cent at the lower end of the scale for March 2021. According to KPMG, “this would be a significant increase from the approximately 2.4 per cent recorded in February 2020”. The 9.5 per ent figure would represent about $12 billion using December 2019 figures of $136 billion credit by deposit taking institutions (DTI).

KPMG argues that the offering of moratoriums by financial institutions will allow these loans not to be classified as non-performing during the moratorium period. Hence, the projected rise in NPL will likely be dampened.

“However, a major source of uncertainty is the projected speed of economic recovery and restoration of jobs lost, and the impact on the performance of these loans when they become due,” the auditing and management firm posits.

In coming to its assessment, KPMG gave a comparative look at Jamaica’s non-performing loan situation during the financial crash in the mid-1990s and when measures were taken then to offload bad loans from the system, resulting in NPL settling at approximately 4 per cent in June 2003 and declining to as low as approximately 2.2 per cent in June 2007.

Once the global financial crisis started to take shape in 2008 to 2010 there was an increase in unemployment, coupled with a drop-off in remittances and a sustained contraction in the overall economy, resulting in a decline in asset quality. This decline arose from the global financial crisis of 2008-2009.

KPMG reports that the decline was significant, as the NPL ratio increased from approximately 3 per cent in March 2009 to 8.9 per cent in December 2011.

Post the global financial crisis, as the macroeconomic indicators improved, the NPL ratio declined to approximately 2.4 per cent in February 2020 but is now estimated to worsen to between 4 per cent and 9.5 per cent.

ESTIMATION OF FUTURE NPL RATIO

In order to project the NPL post-COVID-19 as at March 2021, KPMG used historical data from June 2003 to December 2019 to model the NPL ratio, based on GDP growth and the change in the unemployment rate.

KPMG explains that financial institutions will likely grapple with stressed loan portfolios and liquidity planning issues during the COVID-19 crisis and recovery period. The firm is recommending that financial institutions focus on the incorporation of capital and liquidity stress testing and strategy formulation, credit risk modelling for origination, as well as portfolio monitoring and strengthening of financial risk management policies and procedures.

The assessment takes note of the Bank of Jamaica directly injecting liquidity into the system, in addition to requesting that deposit-taking institutions and their financial holding companies suspend dividend payments for 2020, as these institutions’ expected cash flows will be negatively impacted by their loan moratorium plans, coupled with the expected increase in loan delinquencies.