Delinquencies resulted from personal choices - JRF boss
Published:Sunday | May 22, 2011 | 12:00 AM
McPherse Thompson, Assistant Editor - Business
The Jamaican Redevelopment Foundation (JRF) has knocked the high interest-rate argument as the major rationale for the huge delinquencies on loans in failed financial institutions during the 1990s, suggesting instead that it was a case of debtors 'robbing Peter to pay Paul' or borrowers otherwise exhibiting an unwillingness to repay.
Jason Rudd, chief executive officer of JRF, the American outfit to which FINSAC sold its non-performing loan portfolio, said much of the discussion about how the debts became delinquent has focused on increasing of interest rates and compounding the interest by the legacy banks as the unilateral reason.
However, JRF has itself reviewed the accounts and found the statements being made to be largely untrue, in that only a few accounts had been affected in that regard, Rudd said in testimony last week to the commission of enquiry into the meltdown of the financial sector.
Should have known better
"Individuals often borrowed money that they should not have borrowed, upon terms that they should have known better than to agree to," he said.
Some signed loans with originating legacy banks and financial institutions at rates as high as 70 per cent "and then appeared before this commission and attempted to blame JRF for their financial ruin," added the chief executive.
"The truth is, their financial problems were the result of their own decisions, choices and contractual bargains freely entered into by them, and long before their loans left the legacy banks and financial institutions for transfer to FINSAC or its related entities."
He said the JRF knew when a borrower was qualified for a loan and was able to determine a borrower's ability to repay.
"In the case of every borrower that has complained to this commission about JRF, the fact of the matter is that they were simply not financially capable of honouring, or willing to honour, their agreements with the legacy banks and financial institutions," he said.
Rudd, one of the principals of the debt collection company, which is being represented by attorneys Sandra Minott-Phillips and Gavin Goffe, told Commissioners Worrick Bogle and Charles Ross that the review undertaken by JRF showed loans made by way of current accounts - or what is commonly referred to as overdraft accounts - where in some cases the interest rate reached as high as 90 per cent and was compounded.
That was usually because the borrower would withdraw money from the overdraft account each month, but did not deposit sufficient funds to cover the repayment or even pay the interest that was accruing.
"The very high interest rates were charged on accounts that were in overdraft or overdrawn," said Rudd.
He told the commission that he had mixed emotions about testifying, but seized the opportunity to defend the reputation of JRF, which he said did not cause the problems faced by debtors and should not be blamed for them.
Demand loans
The JRF's review showed those accounts which attracted high interest rates were set up with drawing limits such as J$400,000 or sometimes as high as J$10 million, but would have outstanding balances exceeding J$20 million or more, and "when you add the interest, compounding can cause the accounts to more than double again."
Rudd said the review also showed that banks, in an effort to address the increasing overdraft interest, often converted those accounts to demand loans or commercial paper where the interest rates were in the region of 25 per cent to 40 per cent.
However, borrowers only benefitted if the monthly interest accrual on the converted demand loans or commercial paper was paid. However, conversion was not applied in the majority of cases "so once again the interest accrual would soon overtake the ability for the security to properly cover the debt," he said.
In conducting the review, JRF also found accounts where debtors obtained loans at initial interest rates of 45 per cent and higher - usually related to the construction industry - and because of their lack of experience they underestimated their costs or over-estimated their revenue.
"In most of the cases, though they agreed to make monthly interest payments, the borrowers often make no payments to the accounts at all until they begin to sell the properties, and by that time the interest accrual was such that it was unlikely the sales would be able to retire the debt. So again the banks were left with loans that were not properly secured," said Rudd.
The JRF head, further explaining the rationale for the delinquencies, said they also found "some accounts where persons were borrowing from one bank to pay another, and then borrowing from a different bank to pay that bank, but in the interim made no actual payments on the account," illustrating the axiom of robbing Peter to pay Paul.
Loans were also made that were inadequately secured because the funds were given to a 'regular customer' of the bank or other persons of known status in the community.
The banks assumed, wrongly, that those loans would be repaid because of a person's reputation, Rudd said.
Concurring with evidence given last week by Patrick Hylton, the former managing director of FINSAC, Rudd said the credit documentation showed the banks' approval process was seriously flawed, particularly in institutions that had executive chairmen.
"The documentation shows that the banks did not do sufficient due diligence to ensure that borrowers had the ability to repay the loans being granted to them, other than by way of sale of the collateral," he told the commission.
The JRF review also uncovered loans that were made to an individual or company, but "not a single payment was ever made on the account," Rudd said.
The enquiry resumes on May 30.