1. Managing Your Non- Performing Loan Portfolio Presented by: Faye Ellece Jacobs Of Caribbean Integrated Financial Services Limited The Towers 25 Dominica Drive Kingston 5 Website:wwwcaribifs.comemail:cifs@cwjamaica.com

2. Background to the Jamaican Meltdown High Interest Rate/ unpredictable monetary policies and market conditions Unethical Practices Poor underwriting standards Mismatch of Assets/ Liabilities Poor Monitoring of the portfolio Under-representation of the contaminated portfolio Lending policies that increase NPL Failure to recognized NPL’s Delay in recognizing the extent of the contamination Ever-greening of loans resulting in unreal profits Limitation of the Central Bank to effectively regulate Banks Varying standards by regulatory bodies for Commercial banks and other Financial institutions leading to the creation of various entities within “a group” providing the opportunity for interwoven and incestuous affairs amongst the entities operating within the group.

3. When are the Creation of NPL’s Likely Where the portfolio is being grown at a rapid rate Changes in the lending culture e.g. Where the lending culture changed from centralized to decentralized Other macroeconomic policies that are impacting the loan portfolio Where internal policies and procedures are allowed to weaken Loose underwriting standards Growth in interconnected borrowings Where lending opportunities are contracting Where the financial sector is expanding beyond the capacity of the central bank to effectively regulate and monitor. Poor performance by the business sector

4. Some Characteristic of a Financial Institution that is likely to create excessive NPL’S NPL’S are generally characteristic of those institutions that are: Influenced by external forces which leads to the creation of loans which are risky and marginal from the outset Underwriting standards are weak Internal monitoring system is inadequate Pursuit of profitability at the expense of prudence High decentralization of the lending decision Mismatch of assets and liabilities Domestic decision making process Unmanaged sectoral exposure

5. Warnings Signs Abnormal growth of the loan portfolio Abnormal growth of the loan portfolio Higher migration rates to the NPL portfolio Higher migration rates to the NPL portfolio Liquidity Problems Liquidity Problems Growing discontent amongst customers Growing discontent amongst customers Above average / below average returns from lending operations. Above average / below average returns from lending operations. Above average requests for excesses/ need for constant restructuring of facilities Above average requests for excesses/ need for constant restructuring of facilities Market Rumors Market Rumors Market Panic Market Panic

6. Preliminary Steps to Address The Non- Performing Portfolio Arrest the contagion Arrest the contagion Freeze lending Freeze lending Examine Lending Policies to counteract weak underwriting standards Examine Lending Policies to counteract weak underwriting standards Establish the true level of NPL Establish the true level of NPL Create rehabilitation unit for marginal accounts with well-defined work-out strategies Create rehabilitation unit for marginal accounts with well-defined work-out strategies Move from decentralization to centralization of the lending decision Move from decentralization to centralization of the lending decision Act decisively to address NPL Portfolio Act decisively to address NPL Portfolio Remove decision –making process for NPL’s from Lenders. Remove decision –making process for NPL’s from Lenders.

7. Recommendations to Manage NPL Autonomy Autonomy Creation of a separate Unit Creation of a separate Unit Skilled work out strategists Skilled work out strategists Reporting Bases Reporting Bases Separation of the unit from the influence of the owners of such credits Separation of the unit from the influence of the owners of such credits Compensation Compensation Exit Strategies Exit Strategies

8. Stratification of Loan Portfolio By assets held as security By assets held as security By Value By Value By Activity By Activity By Accounts capable of restructuring By Accounts capable of restructuring Devise strategic plan for large corporate accounts Devise strategic plan for large corporate accounts Design exit strategies by categories Design exit strategies by categories

9. Valuation of Portfolio Ascertain the NPV of the portfolio Ascertain the NPV of the portfolio Value underlying security on “distress sale” basis to determine real values Value underlying security on “distress sale” basis to determine real values Discount for holding time Discount for holding time Discount or apply nil value for items caught under “floating charges” Discount or apply nil value for items caught under “floating charges” Discount for specialized real estate and commercial properties Discount for specialized real estate and commercial properties Manage the sale of assets given current and future market conditions Manage the sale of assets given current and future market conditions

10. The Way Forward Preservation of your customers Preservation of your customers Create new opportunities for businesses that have a ready domestic market Create new opportunities for businesses that have a ready domestic market Avoid the “Herd Effect” Avoid the “Herd Effect” Practice Early Rehabilitation Practice Early Rehabilitation Ease the penalties Ease the penalties Limit credit card facilities Limit credit card facilities Limit exposure to overseas residents Limit exposure to overseas residents Tighten underwriting standards Tighten underwriting standards