Balance needed to tackle current liquidity

By Miriam Dunn

The current liquidity problems the country is facing and the role the banks play during an economic slowdown were both mentioned in a keynote speech made recently by the governor of the Central Bank Michael Bonello at a financial services seminar.

Much has been made of the cashflow difficulties that businesses are currently experiencing and it is not unheard of for banks to be criticised for failing to offer the right kind of assistance during a recession. Observers have been known to point out that in general, rather than helping businesses weather an economic storm or ride out a recession, banks are quicker to exert pressure and even call in loans.

In his speech, Mr Bonello highlighted the need for banks to find a balance between undue risk taking and ensuring that a steady flow of credit was maintained. This, he said, was important to ensure an economy maintained stability.

He admitted that the ratio of non-performing loans was one area that required attention in the financial sector. One of the problems, he explained, was that banks in Malta were having to deal with the legacy produced by these loans in the past, which exacerbated the difficulties encountered during a downturn.

Mr Bonello stressed that a new lending culture was developing and that credit risks were now being better evaluated. But, he emphasised, the ratio should only be brought down gradually.

Asked to comment, a spokesman for Bank of Valletta said it was undoubtedly in line with the governor’s recommendations.

"For new lending propositions, major consideration is now given to the cashflow aspect," Michael Galea said. "As regards non-performing loans, these are being very closely monitored, in the interest of everyone concerned.

"For this purpose, a specific unit has been established within the bank and is managed by experienced personnel in corporate lending."

Mr Galea pointed out that companies which have serious liquidity problems are analysed in depth to establish the reasons behind these problems and the prospects of a turnaround.

"Recommendations are then given to the directors with the scope of helping them to recover from their precarious situation," he said. "In some instances we do not exclude increasing our lending when we feel that this is justified."