Credit risk
The Report: Loans to households increased by 13.1% (or $216 million) as at June 2012, according to the Semi-Annual Economic report 2012 issued by the Economic and Statistics office. In light of current economic conditions and the absence of realistic economic stimulus, the demand for domestic credit will continue to increase for 2013. Industry players may argue that this is normal, but my concern is the pace of growth (domestic credit) in light of flat or declining wages.
The report also noted the significant increase in miscellaneous credit which includes short term lending products such as credit cards and overdrafts.
The Risk: Existing borrowers will seek additional credit particularly during tough economic periods as their savings become depleted and the strength of their pay check is weakened. The increases in credit requests will be used particularly for meeting recurring monthly expenditure. This is a dangerous practice as these monthly expenses should be settled with funds from monthly earnings. If this trend continues Lenders, Credit Providers and Borrowers may find themselves in less desirable situations resulting in financial ruin.
The Solution: The levels of Credit Risk of existing and future borrowers must be analyzed carefully. In addition borrowers should be educated on those respective levels and related remedies if necessary. Accurate credit checks must be completed, which also should include reports from Financial Institutions and local credit reporting agencies.
The monitoring and management of personal credit levels is everyone’s duty. However, lenders should pay close attention to the quality of their loan portfolio with special attention given to short term lending such as credit cards, overdrafts and cash advances as these products can be easily abused and will result in significant losses if not addressed.
Ralph Lewis is a Financial Counselor with LCMoneyPlan.
Category: Viewpoint
Just today I was told by a friend that a bank in town is offering Gov't staff personal loans at a very low interest rate of 20% ? Wow sounds like the bank is trying to help poor people. Reading this blog it is obvious most of the people writing are in the belief that banks are charging little interest in these times. They probably feel they have done enough to stimulate the economics of the country.
I can't wait to all the people who need money to go and get those personal loans. But let me look a little further into the future …….some people will have to be let go very soon from their gov't jobs and when they do What will you all say then? It was their stupidity? They should not have taken the loan? They got it at the best interest rates? Come on lets have a little responsibility eh?
Banks are there to make money for their shareholders. They are not a charity. Here is a shocking reality for you – rich people in well paying jobs get loans at much cheaper rates than poor people in less well paying jobs. Oh the humanity. It is called risk. Interest rates on loans are a function of risk. So if you don't want to borrow at 20% then simply spend within your means.
Dave Ramsey end of story.
Don't you just hate it when some people get on here and pretend to be so pious and disciplined in certain matters? Truth is, unless you were born into a favorable situation, many of us utilize credit in one way or the other at one time or another to make ends meet.
Many people, especially this month, after receiving early paychecks in December are finding it hard to make it to the end of January after Christmas festivities.
In those instances, I would prefer those persons go to a bank and get a temporary facility rather than cut a guy's throat for $9.00 or go around the Office or to other relatives borrowing money.
We are not all financial gurus, sometimes we will slip, it is nice to know that legal legitimate facilities exist to provide temporary assistance during those periods and I do hope they will remain available — even if the author of this viewpoint would prefer to see otherwise.
Love the disclaimer "sometimes we will slip", can people who have bad credit use that when they apply for a mortgage during a bank interview or is that a reserved phrase copyrighted by the elite. Dont want to get sued.
I strongly suggested having fun, maxing out a raft of cards then doing a runner to Cayman for about six years. Such fun.
I believe most of us would agree that a lot of these loans would be paid for in a shorter amount of time if the interest rates that banks charge were lower. It would also be better for the economy and all the social issues we will be facing shortly.
You borrow money to buy a house the house is small the land is small the car is small. The job also pays small but the interest is ridiculous. 3% over prime for a house or land? 6% over prime for a car loan ? We already live in an expensive country .After hurricane Ivan all houses to repair doubled. All least costing houses even without damage from hurricane tripled in insurance cost? Then when you came to adjuster after forty years of paying premium they found ways to pay you less.
If you think about it , isnt this what is creating the difficulty in today's Cayman Islands?
Well what about the bank? They pay no interest to depositor's, they makeit harder if you miss 2 months of car loan ,car is gone. What incentives have the banks given in this global recession?
Imagine if you are older 50-70 years old . Would it not be better to cut interest rates rather then park cars in parking lots or hold on to keys of houses? What about if customers rally to not pay loans and declare bankruptcy. How would the banks try to solve the problem? Wouldn't they immediately take the loss and sell for what is owed? to their friends? What a disgusting system
What should happen is a customer should be able to prove that they have paid a 100% of the loan ( double the amount owed ) and give them their property back.
Interest rates are the lowest they have been in years!!! You have to remember that if banks couldn't cover their costs and make a little bit of money they wouldn't be there to give you that mortgage or car loan. And if credit was even cheaper imagine how many more people would end up with loans they can't afford…
I would suggest that if you are paying Prime +3 on a residential mortgage you are either a) a very bad credit risk or b) see a.
This crisis has shown, again, that banks continually fail to do their job properly. If it was the first time it had happened, I could understand, but it is not. I remember the first crisis I experienced in the 80's in UK…everyone was maxed out on credit and interest rates went up to 20%. Mortgage rates were also that rate. Millions ended up in negative equity.
And now 30 years later, regardless of whether the local banks have a register or not, worldwide banks, including those who can check out credit, continued to give 100% mortgages, credit cards with big limits and so on…all to make more profit. The they crash, and then we all have to bail them out.
On Cayman, as per poster11.56 view, the need for a big or fully loaded car seems to outweigh any other requirement. Even going above that of a decent looking home. That is, I am sorry to say, madness. Where you live is your life. That is where the attention should be. You do not live in a car. A car is just a means of getting from A to B and as long as it works and is safe, who cares what it looks like? And why would you want a fast powerful fuel eating car on such a small island where you can't drive it properly anyway?
I do not believe that Cayman banks, subject to proper legal review of the terms, could not club together to pool information to help prevent the excess lending described. They would be doing us a great service.
Dr. Deepak Chopra, a professor at the School of Business at the University of Chicago was asked what he thought caused the world recession that began in 2008. He said the recession was caused by people spending money they didn't have on things they didn't need to impress people they didn't even like.
Did we not learn anything? The current world economic collapse was a credit collapse. People were unable to pay money they owed. We are now officially spiraling downward.
Neither a borrower not a lender be.
And there I was thinking Deepak Chopra was an MD, physicist and author books on alternative medicine etc.
While I appreciate and agree with the sentiment, that saying has been around since before the 2008 crash and as my friend notes below, Deepak Chopra is not who you say he is.
The quote "Too many people spend money they haven't earned, to buy things they don't want, to impress people they don't like" and similar variations are often attributed to Will Smith, but the original source is unclear. Most people attribute it to American humourist Will Rogers, who lived around the turn of the 20th century.
I hope this doesn't come off as overly pedantic but I have a personal interest in quote origins and the fact that the authors of many amazing thoughts don't get the credit they deserve 🙂
You may be correct about the origin of this quote not being attributable to Deepak Chopra. I did not say that is was. I did however hear these words for the first time from him in an interview with Erin Burnett on CNN which you can find online. No offense intended. I was simply paraphrasing what I heard Deepak Chopra say.
What came first the chicken or the egg? You breezed over declining wages or lack thereof and then went on to admonish homeowners on their use of credit to keep up with monthly expenses. The suggestion of this viewpoint is that the real victims of this would be banks and financial insititutions. That is where the warning is ultimately aimed. It also suggests in a roundabout way that it is the borrowing public and those that have been living on credit that need regulation. Living on credit is never a good scenario and with that I agree. But I'll add in most cases I don't believe people do it by choice. When you have monthly bills to meet, a mortgage, and your wages come up short, whatare you to do? Being made aware your credit score doesn't match your obligations doesn't help the situation. If you are so fortunate as to have money left over when it is put on deposit it is taken out of the economy. Banks and financial institutions then -theoretically- insert it back into the local economy in the form of personal loans and business loans. Local is the key word and it would be the preference for many but that is not often what takes place. The money is invested elsewhere. In places which have nothing to do with the local economy. Therefore although it may benefit the bank and the depositer it does not represent an investment locally. Over a period of time money is drained from the local economy which is where it is needed. It ultimately suffers. Businesses are unable to obtain loans and they lay people off. Those people without work resort to credit. Local entrepeneurs are unable to obtain loans and start businesses because the money seems to make more return elsewhere. Making even less work available. I recently watched a very interesting series from the U.K. It is worth watching and available on YouTube. It is all about 'The Bank of Dave' in which one person decided banks weren't doing what they were intended to do. So he started his own bank.
Thank you, could not have said it any better
Cayman has made a rod for its own back with the 60%ownership rule which is a massive deterrent to invesment in the economy. Corruption is also a huge deterrent right now. Since moving to Cayman I have invested well over $1m in various businesses but not one cent in the Cayman economy. Why? Largely because of the 60% rule. I had outside investors quite keen to open a business here but I told them it was not a good idea because of this rule and the fact that local corruption would interfere with the business. Cayman has done a very good job of deterring outside capital coming in to boost the local economy and employment. That is the reason why the only external investment one sees comes from sweetheart deals such as Shetty, Dart etc, because in the modern global investment environment Cayman has made itself so unattractive.
Its a sad fact but true, most people in Cayman do not look beyond the matching of a monthly income versus the amounts each loan or specific monthly expense. I recall a visit from an employee where I was MD, her query was, my car loan, my mortgage, my child minder and my helper comes to more than my pay cheque, what can you do about it? I asked about her car, it was a Lexus with all the goodies and worth less than the outstanding loan. I asked about her mortgage, it was taken out while the father of one child was helping, he wasnt any more. Without her child minder she couldnt work, and without her helper, she couldnt go out evenings. Her car was better than mine by a long way, her house was much bigger than mine, I did my own ironing so didnt need a helper.
I was new to Cayman at that time, but this story was to become quite common. I recall being concerned that come the downturn, Cayman would see trouble, it seems its happening, and in the long run the banks are going to see some losses. I also recall suggesting that banks had a responsibility not to allow loans that people couldnt afford and was told that without a central database on credit it was impossible to exercise that responsibility because people go from bank to bank taking out new loans, and come payday, would switch money about to cover each banks loan! Part of the trouble was a need to have a "nice" car/condo etc, but in other cases it was the high cost of essentials for families with a single earner. I dont know what the solution is, but yes there is a considerable problem and the lenders have a responsibility to be more careful, whilst the legislators have a duty to provide a framework which allows the banks to compare notes so that they can do their duty!
Given how bad the local banks' property portfolios are right now, this is the least of their worries.
I doubt any of them are solvent in balance sheet terms right now. Which is why my money is not in any of them.
My bank is. Truth is lending in Cayman has always been pretty conservative, if you ever tried to get a loan out of one of them you will understand what I mean. Why don't you have a read of their balance sheet? CNB published theirs in the newspaper the other day, probably on their website as well.
There is a reason that CNB is the bank of choice of locals that do not work in financial services.
How much deposit protection insurance are you getting?
Disparaging comments aside, this is not simply a "local" problem.
Just for kicks can you tell me how many local banks failed during the crisis or post-crisis? And how does that compare to UK and US banks?
Thank you.
I don't think any UK banks failed.
The local banks have almost no capital and Cayman has absolutely no deposit protection insurance scheme in place. Why, oh why, would anyone leave cash in a bank which does not have deposit protection?