The Central Bank of the Bahamas (CBB) says it is relaxing guidelines for domestic banks and credit unions around qualifying criteria for lending to the private sector.
In a statement, it said this reflects the domestic economy’s increased ability to sustainably absorb more credit expansion, given the potential for credit growth to spur larger imports and boost net foreign exchange uses.
“The favorable outlook for the external reserves is expected to remain. In particular, the impact on credit growth is likely to be very modest given the ongoing risks related to the elevated average default rate on private sector loans,” the CBB said.
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It states that, effective immediately, lenders can approve applications for new personal loans on a case-by-case basis, provided the total debt service ratio for the facility and any pre-existing obligations does not exceed 50 percent.
“Unless the central bank has imposed specific regulatory requirements on specific banks or credit unions. This increases the total debt service ratio from the current 40 to 45 percent. The total debt service ratio is calculated as the sum of the total monthly principal and interest payments divided by the total monthly income of the borrower or borrowers.”
The CBB said except in the case of mortgages, lenders could also adjust the borrower’s equity or down payment requirements in line with their internal credit risk management frameworks.
“Particularly subject to the total debt service ratio and other such risk management criteria, lenders may lend up to 100 percent of the borrower’s funding needs. However, the minimum equity requirement for home loans remains at 15 percent. With mortgage liability insurance, the equity requirement can be reduced to five percent.”
The CBB said financial institutions are expected to continue to manage credit risks on both a case-by-case and an aggregate basis to achieve further reductions in the average non-performing loan rate. In this regard, supervisory expectations and requirements related to prudential lending standards remain tailored to institutions subject to specific central bank supervision.
“The central bank will continue to monitor the impact of credit trends on the outlook for foreign reserves and domestic financial stability. The bank will adjust its monetary and regulatory policies as needed to continue to ensure stability and sustainability in the outlook,” she added.