Development Bank still grappling with loan delinquencies

Cayman Islands Development Bank CEO Tracy Ebanks

The Cayman Islands Development Bank continues to struggle with borrowers not paying back money loaned to them, as more than half of the institution’s loans were delinquent at the end of 2017.

Those delinquent loans contributed towards the Development Bank losing $717,000 during the 18-month period ending on Dec. 31, 2017, according to the bank’s most recent available annual report, which was tabled in the Legislative Assembly earlier this month. The bank warned in the report that future losses could extend into the millions unless central government provided it with capital to fund new loans. Audited figures for 2018 are not yet available.

According to Development Bank CEO Tracy Ebanks, most of the delinquent loans were made years ago, and the institution is slowly digging itself out of the financial hole that created. For instance, of the roughly $1.3 million of loans made in 2017, only about 12% are delinquent, she said.

“The high level of delinquencies is mainly attributed to loans that were underwritten under outdated policies,” Ebanks said in a written statement. “The Bank has made full provision for these loans over the years and has not written off debts.”

Collection efforts are also ongoing to recover old outstanding debt, she added. The Development Bank repossessed nearly $10 million of collateral during the 18-month period ending June 30, 2016, and more than $8 million the next period.

However, a dearth of new loans made has limited the bank’s growth.

While the Development Bank reduced the number of delinquent loans on its books from $17.1 million in 2016 to $16.3 million in 2017, the bank’s total loan portfolio also decreased from $33.1 million to $29.1 million during the same period. Accordingly, the proportion of delinquent loans actually increased from 52% of the Development Bank’s entire portfolio in 2016 to 56% in 2017.

By comparison, a healthy commercial bank – which has a lower risk appetite than a development bank – typically has less than 2% of delinquent loans on its books.

Of the delinquencies, about $6 million were mortgages, $5.8 million were business loans, $3.4 million were debt-consolidation loans, and the rest were student loans and other small loans, according to the financial report.

Meanwhile, government has continued to spend millions of dollars to support the bank. Central government injected nearly $10 million in 2016/17, and the bank stated in its annual report that it could post seven-figure losses in 2018 if it did not receive more capital. Government provided the bank $2.25 million last year, and is injecting another $4.5 million this year, according to budget estimates.

Delinquencies have plagued the Development Bank’s books for years, reaching up to 70% of the institution’s loan portfolio at times.

In 2014, a report on the bank was released by Ernst & Young, advising government to close the Development Bank unless government could provide it with significant cash for its operations.

“Political support and action is the driver for change,” stated the report. “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.”

However, government opted to not shut down the loss-making bank, but instead inject more cash into the entity.

“Mistakes were made in the past which led the Cayman Islands Development Bank to the brink of bankruptcy,” former Finance Minister Marco Archer said in November 2014. “This government has taken a more measured approach. Where a business shows true potential, the [Development Bank] will be placed in a position to provide further credit facilities.”

Last June, Auditor General Sue Winspear also included the bank in her report on loss-making government entities – a report that included the Cayman Turtle Centre, the National Housing Development Trust and Cayman Airways.

“The financial position and the high rate of delinquency has marginalized [the bank’s] ability to carry out its primary function to promote, facilitate and provide finance for the expansion and strengthening of economic development in the Cayman Islands,” the audit report said of the bank. Again, auditors expressed concern about the bank’s continued ability to operate without taxpayer-funded support.