(Published in l'express 14 Jan 2021)
Both the Financial Stability Report, (FSR -December 2020) and the statements of the CEO of the Mauritius Bankers Association (MBA) , seem to be an attempt to reassure us that “ Le risque d’une crise financière reste bas “. The CEO argues that “ in simple terms, for there to be a financial crisis, a significant proportion of borrowers must fail to repay their loans. In such a case, financial institutions could face a liquidity problem in a systemic manner, which would cause a financial crisis.”
As detailed out in FSR- December 2020, he adds that “ the Mauritian banks are very well capitalized (well above the prescribed thresholds), they only lend about 75% of their deposits, and there is an excess of liquidity in the market. In addition, the authorities have made available to banks and economic operators lines of financing, including the Mauritius Investment Corporation (MIC), and are closely monitoring the situation. As long as these mechanisms work, and economic operators retain a certain visibility, the financial crisis should be avoided.”
However, our analysis and evaluation of the situation are different. We believe the crisis may not be avoided despite all the swathe of measures or rescue pacakges put in place by Government and the MIC to help borrowers stay financially afloat in the face of sharp income shortfall. We are all well aware that the hospitality sector is highly indebted to the local banks. Most of the loans were extended during the rising tide of the sector , a decade ago when our bankers lent indiscriminately, especially to the then-booming FDI in the hospitality sector and in the money-guzzling real estate sector. Despite increased competition from new entrants in the banking sector, challenges remain in terms of credit concentration risks, increasing non- performing loans (NPLs) and large exposures to the global business sector and non-residents.
Rising NPLs over time
Though the banking sector overall remains well capitalized, the vulnerabilities have increased. Moreover, NPLs have risen substantially as a percentage of total credit facilities, and provisioning has not kept pace with the deterioration in bank asset quality. The emerging NPLs were addressed through macroprudential measures aimed at moderating expansion in credit facilities mainly in the construction and real estate sectors. As for the five large banks comprising the Domestic-Systemically Important Banks (D-SIBs), they were required to hold, over a four-year period, a capital surcharge ranging from 1.0 per cent to 2.5 per cent of their risk-weighted assets depending on their systemic importance. Thus, in a bid to increase the banking sector’s resilience, the Bank of Mauritius had embarked on a number of key initiatives such as the setting-up of a Deposit Insurance Scheme to protect small depositors and of an Asset Management Company to primarily address the adverse impact of non-performing loans on the stability of the financial system
Macro-financial risks
The Country Financial Stability Map describes the development of macro-financial risks and conditions in the country, with four risk indices (macroeconomic risks; inward spillover risks; credit risks; and market and liquidity risks) and two macro-financial condition indices (risk appetite; and monetary and financial conditions). Each index is calculated by taking into
consideration various macroeconomic and financial indicators that affects risks of the financial sector . Under the moderate and severe macroeconomic scenarios, these indices show that risks arising from the banking sector have increased with deteriorating asset quality and lower profitability. Risks from the corporate sector had also increased due to higher leverage ratios and lower returns on equity. FSR, December 2020, notes that “risks for the corporate sector are elevated, as are the risks that they pose to the financial system and economy as a whole. Appropriate and timely measures to buoy this sector remain important at this juncture”.
Meeting the requirements of credit-rating agencies
Given that our top banks have been opening up to business and trade finance outside of our frontiers and they now earn a major part of their income from such activities, they are also subject to greater scrutiny from the credit rating agencies including stringent controls on large loans, including asset audits and reviews, and strict checks every quarter. These agencies also expect them to mitigate their potential risks by fostering the development of alternatives to bank lending to reduce portfolio concentrations and increase competition, encouraging sound international risk diversification, strengthening provisioning levels so as to enhance the resilience of the system to a downturn in economic activity.
Mounting NPLs meant a risk of being downgraded by these agencies . Thus, the top banks were wary of lending despite sitting on huge cash piles. They cut back their lending to construction and tourism sectors as well as to other precarious economic operators to improve their risk profile and asset quality.
The proverbial Mauritius Investment Corporation (MIC) to the rescue
If there was no MIC, we would have had to create one. The authorities had no choice, Government and the MIC had to step in to bail out the distressed sectors . Without access to it, businesses cannot grow and, without growth, our economy will continue to teeter on the edge. For how long can Govt and MIC sustain these sectors? And at what cost ?
A prolonged downturn in economic activity in the key sectors where bank exposure is significant could potentially threaten bank solvency. As hotels and companies fail to repay banks and their debt balloons, the latter will have to make greater provisions for NPLs and recapitalise their bleeding bad debts. The existing NPLs on the balance sheet of the top banks were already beginning to look like just the tip of the iceberg, with an expanding mass of bad loans lurking below the surface.
A crisis ahead?
The financial system is navigating in deep and uncharted waters. Corporate borrowers are stuck in an artificial zombie state, and a rude awakening awaits as insolvency risks will inevitably materialize in due course. MIC can only provide limited support to companies facing liquidity problems. Confidence issues arising from continued BOM money printing for fiscal purposes, currency depreciation and inflation are likely to intensify, posing disruptive threats to capital inflows and overall financial stability. Unless there is an effective response to the looming risks and threats, we could be staring at a financial crisis of unprecedented magnitude.
