Bank needs collateral for cheap loans


(CNS): The Cayman Islands Development Bank is offering 1% interest rate loans on “great terms” to small businesses as part of the government’s economic stimulus package. However, borrowers will still need to provide an acceptable form of “collateral to be held as collateral for the loan,” CEO and director of the bank, Tracy Ebanks, told CNS. To get cheap money, most borrowers will end up putting a lien on their home as the only way to get the loan.

Ebanks said the bank must remain viable and protect its ability to collect the cash it lends.

Loans are offered to small businesses hit by the COVID-19 health crisis at 1% fixed interest for the first year and up to 4% fixed for the remaining term of the loan, with interest capitalized for the first 6 months . And although the loans are part of a government stimulus package, the government does not guarantee the loans, resulting in the need for collateral from the borrowers.

Ebanks explained that the government guarantee is issued to the bank as collateral against its potential loss. The C $ 5 million set aside for the loan program is funded from the bank’s available liquidity, she noted.

“Despite our due diligence, the collateral requirements are relaxed so these loans are seen as high risk,” she said. “The economic recovery is still uncertain. The government guarantee helps mitigate this risk and results in a lower loss provision on the bank’s balance sheet. Obviously, the objective is to take out good quality loans so that the bank does not need to call on the state guarantee.

But she warned that it was too early to predict the speed of the economic recovery.

Ebanks said that even though development banks operate differently from commercial banks, they still need collateral. However, the CIDB boss said there had been misconceptions about the type and amount of assets that can be put in place to protect a loan with respect to this particular special loan program.

Claims that borrowers must provide 125% of assets for these low cost loans of up to $ 50,000 are incorrect, she said, as this only applies when the borrower has failed. no own assets and uses a personal guarantor in the absence of any other security.

In this case, she explained, if the loan application is for $ 10,000, then the guarantor must show that he has a tangible net worth of $ 12,500. “Most banks don’t use guarantors as their sole source of repayment as it can be difficult to recover through the courts,” she said.

Typically, this low cost loan program offers up to 80% of the security that is pledged. Ebanks said business loans are high risk, so it’s generous compared to most commercial banks, which would only offer 65% of the value of all assets.

“The maximum loan under this program is $ 50,000, so if a client has a property valued at $ 62,500, they would be eligible for 100% financing,” Ebanks said.

“We also take other forms of security, such as assignment of receivables, second charges on homes and even cash values ​​in life insurance policies. These are not acceptable standard stand-alone forms of security, but we are working with customers to mitigate the risk, ”she added.

In partnership with the government, the bank has also launched an initiative where customers can get free assistance in preparing financial statements and business plans from finance professionals to submit to the bank for loan review.

Ebanks said the loan program is designed to help businesses that were viable before the COVID-19 pandemic and that are able to demonstrate a local market or an ability to recover quickly when borders open.

“Unfortunately, businesses that were struggling before COVID may not get the help they need because they were reporting losses without any evidence they can recover,” she said. “These individuals would not benefit from a loan to finance losses with more debt.”

Ebanks believes the criticisms that have been leveled at the bank stem from a lack of understanding, she said, noting that CIDB is audited by the Office of the Auditor General and CIMA. He is required to comply with regulations and adhere to policies and law so that the institution can remain stable, especially in times of crisis, she noted.

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