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A report highlighting the growing number of bad loans on the books of the Development Bank of Samoa (DBS) has led a prominent economist to declare the bank's operations cannot survive in their current form.
A recent report into state-owned banks in the Pacific released by the Asian Development Bank (ADB) found that the Development Bank of Samoa was the most reliant on debt infusions of any government bank in the region and had generally "poor financial performance".
DBS was also found to have made a high proportion of "non performing" loans (or loans on which repayments are more than 90 days past due), rising to as much as half of its portfolio in 2016.
"The bank cannot go on like this," said Dr Neelesh Gounder, a Senior Lecturer at the School of Economics at the University of the South Pacific.
"It is not going to work in a sustainable way and then that will be the key here now, and that’s why the report says that the current form of the Development Bank of Samoa is not on a sustainable path"
By client size, the DBS loan portfolio is dominated by large corporations (82 per cent), with micro, small, and medium-sized enterprises at 18 per cent and staff with 1 per cent.
Dr Gounder said the high representation of large corporations in the DBS loan portfolio raised questions.
"What we also we see here is that the majority of the loans are to large corporations, and if we are talking about concessional interest rates then it is important that the interest subsidy on loans should be used to target specific sectors, mainly micro, small and medium enterprises," he said.
"[If] they know it’s the 'Development Bank of Samoa', it could be that’s why the default rate is high.
"It’ll be very interesting to see why these large corporations don’t go to the commercial banks for loans and it is the large corporations who seem to make up a large proportion of these loans."
The DBS has an official government target of making returns of seven per cent on its equity. It has consistently failed to reach that target and only turned a profit across two years between 2010 and 2017, the report found.
"The poor financial performance of DBS reflects the constraints under which it operates,” the report said.
In 2014 the bank's return on its equity dipped to as low as -9%. while figures for 2018 published on the Ministry of Public Enterprise website showed a return of -3.9% last year, amounting to a $2 million (US$673,000) loss.
The Bank's mission is “to promote the expansion of the economy of Samoa for the economic and social advancement of the people of Samoa.”
The poor performance is also attributed to a large portfolio of loans, more than 80 per cent of which have gone to large corporations.
Dr Gounder said the bank had to review its mission of providing cheap concessional loans as a form of community service.
"It needs relook at its operations and it should bring back a focus on a strong commercial culture," he said.
"If it is required to focus on community service obligation then the government must be ready to step in to provide subsidy for lower interest rates, because no financial organisation can provide cheaper loans and survive.
In 2017, approximately 68 per cent of the DBS loan portfolio was composed of concessional credit and covered by a government guarantee, including T$39 million (US$13.1 million) for businesses affected by Cyclone Evan, and T$30 million (US$10 million) for hotel and private home owners under the Commonwealth Youth Games and Small Island Developing States programs.
The ADB also called for a review of the way in which the bank was dispensing loans: "This means more transparency and adherence to the Public Bodies Accountability Act”.
By sector, tourism sector has the biggest slice of the bank's loan portfolio at 65 per cent, followed by a range of other small businesses at 20 per cent and agriculture at 10 per cent.
“This is partly a result of the decision of the government to use DBS to finance disaster recovery efforts, many of which were directed at the tourism sector,” reads the report.
Dr Gounder said the bank's approach to lending was liable to spin out of control.
“If the government does not pay for concessional loan or the money does not come from elsewhere, no bank can continue to provide loans on concessional credit,” he said.
He suggests a readjustment of the banks focus a “strong commercial culture”, which should support specialisation into "climate of risks not addressed by private commercial banks.
“I also understand it is community service obligation, but it does not receive any support from the government, so the interest rates do not fully reflect the risk of lending in various sectors.”
DBS relies on term borrowings to fund 66 per cent of its operations. These are sourced from the Central Bank of Samoa (70 per cent), Samoa National Provident Fund (14 per cent), and multilateral donors (16 per cent).
DBS have did not respond to questions from the Samoa Observer.
The Asian Development Bank report is titled, 'Finding balance 2019: benchmarking the performance of state-owned banks in the Pacific'.
SOURCE: SAMOA OBSERVER/PACNEWS
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