The strategy of the Development Bank, established in 2002, apparently was to provide Caymanians with loans on conditions no commercial bank would ever entertain. Absent from the strategy, apparently, was a substrategy of how they would pay the loans back.
Lucky borrowers shared in considerable largesse: As much as $500,000 for businesses; $300,000 for homes; $75,000 for students; and (exclusively for civil servants) unspecified amounts for auto loans.
As the U.S. and the rest of the world have learned via the subprime mortgage crisis and global recession, when a bank loans money on friendly terms to people who aren’t able, or likely, to pay it back, the results are predictable: The borrowers take the money, the bank doesn’t get repaid, and the bank goes under or is bailed out.
The bank’s general manager Tracy Ebanks told Finance Committee last week that between 60 and 70 percent of the bank’s business loans were delinquent in addition to 30 percent of student loans and 32 percent of mortgages.
When two-thirds of Cayman businesses, one-third of students and one-third of mortgage holders are not repaying their debt, the only plausible explanation is they should never have been given the loans in the first place.
All the borrowing, losses and non-payments have accumulated over time. Next year, the bank is scheduled to repay some $30.5 million in bond debt.
According to budget documents, bank management plans to push back the due date another five years. (Like customer, like bank.)
In all, the bank’s total debt – more than $35 million – is about equal to the principal amounts owed by bank customers – $32 million. That sounds more rosy than it actually is, since the default rates are so high.
According to Ms. Ebanks, the bank is currently pursuing litigation involving nearly 100 accounts. We’ll see what the bank’s success rate will be in the courts, and how much of the recovered funds go to attorneys involved in the litigation.
It’s no wonder that government has been unable to find someone willing and suitable to act as chairman of the bank’s board of directors, a position that has been vacant since May 2013.
In the meantime, the government continues to keep the bank on life support, acting as guarantor for the bank’s debt and feeding it from general revenue. Next year’s subsidies include a $1.5 million “equity injection” as well as about $500,000 from Cabinet to help cover operating expenses.
The Development Bank’s bleeding needs a tourniquet – now. For too long, the Development Bank has been a one-way street for the transfer of public funds from the politically controlled treasury into private pockets.
Lawmakers and bank officials need to reverse the flow of cash: Stop making new loans, continue taking payments from solvent borrowers, and, after recovering as much debt as possible, close the local piggy bank for good.