Unless the government can find significant cash to fund it and the political will to operate it, the Cayman Islands Development Bank should be closed within a year, a consultant’s report recommends.
The bank is a quasi-government entity that provides loans to Cayman Islands businesses, home buyers and students. It is governed by a board of directors appointed by elected officials.
According to information provided to the Legislative Assembly’s Finance Committee in June, the bank has $30.5 million in loan debt that comes due next year.
The Ernst & Young consultant report considered three options for the bank. First, that it could be sold to a private sector entity; second, that it could be “recapitalized” and potentially commercialized through a private-sector partnership; and third, that it be closed.
“Political support and action is the driver for change,” says the report, which was released last week. “If there does not exist a political will and support for the mandated functions of [the Cayman Islands Development Bank] endorsed by additional capital, then the whole service offering and function … can be abolished.
“There is no long-term benefit to [the development bank] continuing to operate in this existing state – which is effectively a run-off of the historical loan book with a very small amount of new lending.”
According to finance committee testimony, 60 percent to 70 percent of business loans granted by the development bank were delinquent as of mid-June.
Bank managing director Tracy Ebanks reported that nearly 90 percent of the companies that are unable to make their loan payments are startups. First-time business loans are considered extremely risky and tend to attract the highest rates of default, she told lawmakers. Many companies that missed loan payments could not qualify for a loan from a commercial bank and typically needed additional capital to deal with the downturn in the economy, she said.
Delinquency rates for student loans and home mortgages are “in the range of” 30 percent and 32 percent, respectively, Ms. Ebanks said.
As of June, the bank had about $1 million in student loans in various stages of drawdown. However, as a result of the slowing of the economy, many students who graduate are unable to find employment, even if they have master’s or bachelor’s degrees, Ms. Ebanks told the finance committee.
The high rate of mortgage defaults is also a consequence of the weakened economy, she said.
“We also find that our customer base is having extreme difficulties paying for their homeowner’s insurance. The rates are extremely high and we deal with the lower income families. So a lot of times we have to finance their homeowner’s insurance premiums and tack it on to their principal.”
While the bank continues to operate a student loan program with funds generated from its operations, it has not granted new business loans for some time due to its fiscal situation, Ms. Ebanks said.
The EY report stated that about $30 million in development bank debt will have to be refinanced, since neither the bank nor the government currently has available cash to pay off that debt. “[The bank] currently has no capital to lend,” the EY report noted.
Moreover, the development bank has not been able to finance its own operational costs, the EY report revealed, though the 2013/14 budget year fared much better than the previous two, reviewers said.
“[Operating] losses have been financed through rolling up debt,” the report stated. “This is not sustainable long term.”
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