Business Page – October 27, 2002

Introduction

The NBS, the country's only institution of its kind, holds its Annual General Meeting tomorrow afternoon at the Ocean View Hotel, East Coast Demerara. In today's Business Page we look at the 2001 financial statements contained in the Annual Report of Guyana's leading non-bank financial institution whose assets are almost equivalent to the combined assets of Demerara Bank and Citizens Bank Limited.

The NBS was formed in 1940 following the failure of the then British Guyana Building Society Ltd. The phoenix-like success of the institution has been referred to in the Globe Trust case which is currently engaging the attention of the courts. NBS, a cross between a co-operative and a financial institution is unique in many ways: what it refers to as shares are in fact savings accounts, it can only make advances to members, its advances are secured by way of mortgages on immovable property, its income is tax-exempt, there is a ceiling on the amount which it can make on a single advance and its investment options are restricted by law. Significantly and despite its size and numerous calls for its better regulation by the Bank of Guyana which is responsible for supervising all financial institutions, it is not licensed under the Financial Institutions Act.

More recently, it has received adverse publicity both in editorial comments in the Stabroek News and from members dissatisfied over the abuse of proxy votes to remove long serving directors and to secure the appointment of other directors. With the usual touch of irony, attempts to restrict what Stabroek News, perhaps a little too boldly, described as " this unlawful practice" by amending the offensive provision, were opposed and defeated by the very directors mainly through the very vehicle of proxy votes!

For this year the financial statements contained in the Report are supported by additional information which helps the reader to better understand the numbers. The Report of the Directors which is a modest improvement over last year is rather bare and members will have to attend the AGM to hear the Chairman present his report. The venue change to an out-of -town location is not only inconsistent but inconvenient and insensitive to the many ordinary folks for whom an attendance at an AGM offers some form of satisfaction.

The Income Statement

The Society uses the more commercially appropriate term "net profit" which does not adequately reflect the nature of the Society's operations since it can manage its bottom line by the simple device of an interest rebate to its borrowers or the payment of a bonus or dividend to those who invest in its various forms of shares. Indeed given the nature of the entity, it is difficult to justify the huge revenue reserves which now amount to G$1.9Bn., higher than that of GBTI $1.3Bn and NBIC $1.7Bn, but less than Banks DIH $4.021Bn and DDL $3.609Bn.

The average rate of interest charged on loans fell marginally from 11.72% to 11.57% while the average rate of interest earned on investments declined from 11.83% to 10.44%. The interest rate earned on 3 months + deposits was a healthy 11.4%. The returns on investments which include close to G$1Bn. in cash, are highly attractive but there is a real interest rate risk due to the falling rates of interest on Treasury Bills being progressively brought down as a result of the extreme liquidity in the banking system. Surprisingly, the Report has dropped the very useful information on the rates earned on investment making any evaluation of the risk more difficult than normal. According to the 2000 Report the discount rate on Treasury Bills, most of which were up for maturity in 2001 ranged from 9.6% - 11.4%, the interest rate on UK Government Treasury Loans ranged from 5% - 9%.

The average interest paid on investors funds declined from 9.2% to 8.9% which is still substantially higher than the rates available to depositors at commercial banks. Net interest income is $487mn., only slightly higher than it was two years ago despite a significantly larger asset base. This reflects the nature of the business and the difficulties faced by financial institutions in an over-liquid economy with only modest lending opportunities.

Total expenses fell by $10Mn. to $298Mn. despite a $20Mn. increase in management expenses. The charge for staff costs increased only marginally but "other" which is not expanded on, rose from $77Mn. to $92Mn. There was a significantly lower charge for bad and doubtful debts provision ($5.6Mn. compared with $30Mn. in 2000) despite an almost doubling of the aggregate amount of mortgages on which repayments are in arrears and a large increase in the value of properties in possession. Charitable donations reduced from $6Mn. to $3.6Mn which is perhaps the lowest for several years.

Because the Society's income is tax-exempt and it does not usually pay dividends, the full net profits are transferred to reserves further enhancing the Society's financial strength.

Balance Sheet

The Society's total assets increased by 25.3% while investors' funds which are in effect deposits increased by a slightly larger 27.6%. The balance sheet continues to be strong with cash and marketable securities representing 57% of depositors' claims. Cash resources increased by 84% during the year and by a staggering 853% since December 1999. Loans increased by 15% in 2001 and by 38% since December 1999. This suggests that money is coming in by way of deposits at a faster rate than it can be invested in loans and securities which could spell difficulties for the Society if the trend continues.

Despite the substantial increase in the loan portfolio and the loans on which repayments have fallen into arrears, the provision for loan losses at the year fell raising the question whether this was to smooth out profits which would otherwise have been lower than the previous year. Given the state of the economy as well as the legal system, an increase in provision would have been more plausible.

Conclusion

The Society remains an extremely sound institution with very prudent rules and policies. While it is a financial institution, comparisons with commercial banks are distorted because the latter are subject to very stringent income recognition and provisioning rules which do not apply to the New Building Society. A licensed financial institution is precluded from taking up interest on non-accrual loan while the NBS Report is silent on its policy in this regard. As a tax exempt entity the Society can pay higher rates on borrowing and lend at lower rates than the commercial banks which are subject to corporation tax at 45% or M.C.T. of 2%, as well as reserve requirements with Bank of Guyana. On the other hand commercial banks have fewer restriction on lending and a far wider range of security it can take to support advances or services which it may offer.

The Society's rules however are out of date and out of place in a modern financial system. It is far too easy for the institution to he hijacked by a few ambitious individuals or for progressive changes to be stymied by undemocratic practices as has happened in the past.

At the last AGM held at the Umana Yana, the members agreed to the setting up of a committee including members to review the Society's Rules. One year later those rules remain firmly in place.

The accounts should make necessary reading for those responsible for monetary policy. The economy is awash with liquidity and not enough lending opportunities. This could force financial institutions to further drop interest rates on deposits to a point where it becomes unattractive to save in the Guyana financial system. And that could easily lead to an exchange rate problem as institutional investors and financially savvy individuals seek some form of security in other currency.

Next week we will look at GBTI's 2001 Annual Report.