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Beckford blames BOJ for loan defaults

Published:Friday | March 25, 2011 | 12:00 AM
Elon Beckford, former head of the Horizon group of companies. - File

Elon Beckford, chairman of the defunct Horizon Merchant Bank, is blaming Jamaica's central bank for the high default rate on loans in the 1990s, saying its high-interest rate policy put too big a squeeze on capital.

Horizon Merchant Bank, which was established in 1991, was one of the many banks that collapsed.

"It was clear that the high-interest rate regime placed excessive pressure on borrowers operating emerging businesses," said the former banker, in testimony before the Finsac enquiry Thursday.

"This resulted in higher default rate on loans made by indigenous institutions and erosion of their capital due to the mandatory loan-loss reserves introduced by the regulators in the period."

He said the Bank of Jamaica reversed interest rate policy direction by increasing its instruments to 50 per cent and higher, forcing financial institutions such as his to increase the rates on its loans to maintain a positive net interest margin.

"At this time, the break-even interest rate, that is the effective rate, taking into consideration cash reserves, was in excess of 76 per cent," he told the Commission.

He said the bank's loan portfolio comprised a mix of construction, manufacturing and tourism.

Questioned by Commission chairman Worrick Bogle on how borrowers, such as developers, could sustain payment on their loans at 70 per cent and above, Beckford said this was impossible.

" ... When you are faced with this kind of this dilemma you simply relent," he said. "What are the options you have? You call the loan," he said.

Beckford said this high-interest rate policy was not sustainable.

"All of us kept saying this madness cannot continue, the interest rate must come down. So, both the developers and the institutions kept hoping for the signal that would bring down interest rates," he said.

"The interest rates went on far too long. Just think what would have happened in this economy if we had backed off from those high interest rates 12 months earlier, 18 months earlier, 24 months earlier; maybe we would not have this commission here today. The fact is that it went on just far too long," he said.

>> See more Finsac stories on Pages 8 and 9.