Banks should do More

Maltastar  

   

I have yet to meet anyone who disagrees that the economy is going through a bad patch.   On the contrary quite often when economic operators relate to me their direct experience they expose a bleaker picture than I can subscribe to.    Quite often I have to challenge their assertions to ensure they are not relating what they perceive as my wanting to hear.

But invariably the emerging picture is one where demand is sagging (domestic demand that is, because export operators seem to have a more stable economic environment) and the cash flow cycle is turning very very slowly.

“As a professional banker I am the first to support the view that banks should be very cautious is handling depositors’ money.”

Quite often banks are blamed for making the situation worse than it needs to be.   As a professional banker I am the first to support the view that banks should be very cautious is handling depositors’ money.

Experience is riddled with stories of economic collapse where the banks are made to sustain, through reckless or tele-piloted lending, economic non-performance.  Invariably facing reality could be delayed but never avoided altogether.   When matters run out of hand and a liquidity crisis develops forcing loss of confidence in the financial system the whole pack of cards crumbles in a very short time.   What takes a long time in coming crashes in a few days.

So banks are right in putting the safety of their balance sheets and of the financial system as a whole before any other priority.   But this is not to say that banks should take a disinterested view in playing a useful part in making sure that the economic slowdown remains shallow and that the economy is re-engineered onto a growth path as quickly and as effectively as possible.

Banks cannot do it on their own.   It is primarily the responsibility of macro economic managers to create the right scenario for this.   And economic management in modern economies is a shared function between the government executive and the monetary authorities.

Governments use fiscal policy to loosen the tax rein and allow more purchasing power in the hands of the consumer.    Monetary authorities loosen the monetary reins to bring down interest rates stimulating consumption and investment.

But this is only possible is the context of macro economic stability.   If, as in our case, the country has been burdened with huge public fiscal imbalances which have cause the real national debt to double in the short space of 5 years effectively reaching some 90% of the GDP, macroeconomic managers room for maneuvering could be very limited.

“So in the particular circumstances our economy is in, commercial banks have to carry a higher degree of responsibility to ensure that things don’t get worse than they really need to”

Loosening the fiscal and monetary reins in such circumstances could be a dangerous recipe for creating inflation which could undermine the very basis for a sustainable economic recovery.

So in the particular circumstances our economy is in, commercial banks have to carry a higher degree of responsibility to ensure that things don’t get worse than they really need to.    Knowing that their macro-economic masters have limited effective tools at their disposal to engineer an economic turnaround banks need to be doubly sensitive to their important role in  oiling the economy back to normality.

They do this through different measures.   Firstly they should be selective in financing new ventures which will lead to increase in capacity making dampening of demand much more serious for existing operators.   This applies not just to private sector demand for credit but also to public sector demands.   Banks should avoid being forced to finance expenditure which by all measures should be financed through government consolidated fund.     Financing the requirements of the Foundation for Tomorrow’s School clearly falls in this category.

Secondly and very importantly is the way they deal with existing credit exposures that under the burden of economic downturn are finding difficulties in keeping their commitments with the banks.

With those operators who are genuinely being effected by the economic downturn or by the re-structuring process banks cannot just solve the problem by simply throwing the book at them.   I am hearing of scandalous cases where banks are proposing borrowers to sign over their property to the bank at deflated prices so that the bank will act as a real estate agency and sell the borrowers’ property by dumping it on the market or arranging private deals.

“Their priority should be aiding the re-structuring and not simply become official channel  for exporting domestic savings”

This is scandalous because the with the substantial economic power which society places in their hands banks have an obligation to manage their affairs in a transparent manner.   When they decide to foreclose on property held as security society has produced legal systems meant to preserve such transparency.   In my days as Chairman of Mid-Med Bank as a matter of policy we used to allow a period of 12 months after legal foreclosure during which the borrower could reclaim his property by paying up the loan previously defaulted upon.    By-passing these legal transparent systems by forcing borrowers to sign open preliminary agreement giving the bank the right to make a private deal with their property is not in my dictionary for responsible banking behaviour.

It is crucial that at this stage of the economic downturn, whilst strengthening their provisions policy to preserve the integrity of their balance sheets, banks need to show a generous dose of forbearance in offering re-structuring deals to their borrowers in difficulty to ensure that the market is not flooded with foreclosed property at a time when demand is sagging.

Clearly banks should be doing more.   Their priority should be aiding the re-structuring and not simply become official channel  for exporting domestic savings.