Minister pledges to review Development Bank loans strategy
Having large corporations dominate a poor-performing loan portfolio is in the "past" for the Development Bank of Samoa.
So says the Minister of Finance, Sili Epa Tuioti, who has pledged to review the state-owned bank's strategy.
A recent report into state-owned banks across the Pacific released by the Asian Development Bank (A.D.B.) revealed that the D.B.S. loan portfolio is dominated by large corporations.
Larger corporates make up an estimated 82 per cent of loans on D.B.S.'s books, the report found, with micro, small, and medium-sized enterprises at 18 per cent and staff one per cent.
But Minister Sili said he would advise large corporations to seek finance from commercial banks, rather than borrowing from the Government-backed Development Bank.
The report concluded that the continued reliance by D.B.S. on Government funding, coupled with a requirement to under-price risk on its loans, would likely erode the bank's remaining equity base. That is, in its current form, "it cannot operate sustainably".
"We are currently working with A.D.B. and also the Development Bank [of Samoa] to look at how we can sort of improve the Development Bank [of Samoa] operations," said Sili.
"Obviously we’ve asked A.D.B. to come and do a review of where things are, although we know and what changes we need to make.
"So obviously we have to learn from the past mistakes and see where we can do better, but also ensuring that the Development Bank [of Samoa] continues to provide assistance to our people in the communities."
The Finance Minister said a collaboration between D.B.S., the A.D.B., International Finance Corporation (I.F.C.) and his Ministry has started to look at different models to improve the performance of D.B.S. as Samoa needs a development bank.
"We do need a Development Bank for Samoa focusing on a developmental aspects of those who are just wanting to start, whether it’s a plantation or a small business," he said.
"And now that we have good commercial banks, we should leave all the large commercial loans to the commercial banks but for the Development Bank to focus more on small to medium businesses."
Currently, the large corporations that make up most of the bank's non-performing loans portfolio have been given a chance to get their businesses together; Sili said it is important to give these businesses time to sort out their finances.
"So we’re still managing some of those businesses, who are still owing money to the Development Bank, we’ll give them a holiday for 12 months before they start to go and put their businesses in order," he said.
"But I think it is important to give them an opportunity to go and think if they really can sustain those loans or if they want to sell their property themselves, I mean that would be really really good, otherwise we will continue to look at how we can do it.
"But obviously going forward, I don’t expect these types of loans to be a part of the Development Bank portfolio."
Sili said D.B.S. will be sticking to small-to-medium projects in the future, with the exception of "good projects" which have the capacity to generate funds to repay their loans.
"We will be a lot more strict and selective," the Minister added.
"When someone wants to borrow from the Development Bank and we assess the business case and they can do it, then why not.
"But otherwise for the very large projects, my own advice to go to the commercial banks."
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.”
"And the good thing about working with some of the smaller projects, [it's] because the agricultural loans at the Development Bank now, they are very good, very few if any has defaulted," he said.
"So it’s our little people that are borrowing from our Development Bank because it’s to help them, they’re not commercial businesses but we’re supporting them [because] they need to be supported.
"Obviously there are [also] some commercial clients of the bank that are doing very well they’re paying their debts."
The D.B.S. has an official Government target of making returns of 7 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 Minister said they are working to look at alternative ways to make sure that the bank does continue to operate and improve from its current state.
"So we’re doing this review now and that where we’re working with the A.D.B. and so we’re looking at different models, you know obviously with that report there are certain things that we need to discuss [and] eventually there will be a hybrid of their reviews and our reviews but we want to make sure we don’t fall ball to where we are right now," he added.
By sector, the 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.
The Asian Development Bank report is titled, "Finding balance 2019: benchmarking the performance of state-owned banks in the Pacific".