It is without a doubt that the world’s economy took a turn for the worst at the beginning of 2020 as the COVID-19 pandemic emerged. This pandemic has negatively impacted many lives across the world, thus directly and indirectly affecting the world’s economy.
The pandemic has caused many to either lose their jobs or work less, which influenced their earnings. This resulted in lower spending powers for some, increased loans, increased credit payment terms along with a decline in demand for luxurious items for households. On the other hand, the business sectors took a hit that caused some of them to become bankrupt around the world, putting many out of jobs along with unsettled debts.
Studies have shown that this crisis has resulted in the largest and fastest decline in international flows in modern history. There is a 13-32 per cent decline in merchandise trade, a 30-40 per cent reduction in foreign direct investment, and a 44-80 per cent drop in international air travel in 2020. These numbers show a major push back of globalisation’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 minimise 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– one per cent and up to two per cent– on customers’ loans below GYD10M, until December 30, 2020.
As for the lending rates, the existing ranges are between 6.5 per cent–16 per cent 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 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 half-year report prepared by Bank of Guyana, as of June 2020, 15,641 facilities have benefitted 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—Republic Bank Limited (RBL), Guyana Bank for Trade and Industry (GBTI) and the Demerara Bank Limited (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, the Bank of Nova Scotia was responsible for 85.2 per cent ($17.2 billion).
With these unforeseen concessions put forward by the commercial banks, along with the Bank of Guyana, the profit of these institutions will be greatly affected. These banks will have to make provisions for their expected losses on loans and investment portfolios.
In a recent article, Republic Bank made a statement that they have a decline in profits as of 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.
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.
In conclusion, it can be seen that the banking sector took a hard hit for all during this COVID-19 pandemic season as the commercial banks were the ones to step up and provide assistance to their customers. Though they be seen to make a profit, they have lost millions compared to 2019. The household and business sectors have put pressure on the banks to maintain their financial objective of maximising their returns.