By Joel Julien
Copyright trinidadexpress
Household debt and non-performing loans (NPLs) are emerging as key risks to Trinidad and Tobago’s financial stability, the Central Bank warned in its latest Financial Stability Report, titled “Navigating Global Uncertainty: Safeguarding Domestic Financial Stability.”
The Central Bank stated that household credit expanded briskly in 2024, driven by strong demand for consumer loans and residential mortgages, supported by relatively low inflation and stable interest rates.
However, it warned of a significant rise in non-performing loans, reflecting repayment challenges among borrowers.
“While this lending growth contributed positively to domestic demand, it also led to higher household leverage. Stress scenarios suggest that a sharp rise in non-performing loans (NPLs) stemming from repayment challenges, particularly by more vulnerable and highly indebted borrowers, could adversely affect commercial banks’ capital,” it stated.
“Continued vigilance is necessary to monitor household balance sheet health, and policies promoting prudent lending standards will be important to safeguard financial stability in the event of adverse shocks,” the Central Bank stated.
The Central Bank stated that rising household debt in the current climate of global economic uncertainty increases the exposure of the financial sector to adverse shocks to household income and asset values.
“Growth has been strong in key segments such as real estate, motor vehicles and ‘other purpose19’ loans; however, signs of strain are emerging, reflected in a modest rise in NPLs alongside an uneven recovery in the labour market. At the same time, consumer deposits have remained largely unchanged, suggesting sustained resilience in the banking sector. Looking forward, stress test results show mixed resilience of the financial sector to shocks across the consumer loan portfolio,” it stated.
The Central Bank estimated that household debt rose by 6.8% year-on-year to $70.0 billion in 2024.
This represented 40.6% of GDP, which remains below the pandemic peak of 4%.
The Central Bank noted that consumer loans extended by the consolidated banking sector accounted for 66% of household debt and grew significantly, rising 9.5% over the year.
“This growth was primarily driven by real estate mortgages, alongside ‘other purpose’ loans and new motor vehicle loans, which saw nominal increases of $1.2 billion, $1.0 billion, and $0.66 billion, respectively. Real estate mortgages remained the largest segment of the consumer loan portfolio, making up roughly 43% of the consolidated banking sector’s consumer loans,” it stated.
The Central Bank said that as the financial sector extends more consumer credit, its exposure to risks associated with households’ repayment capacity also increases.
“This risk is especially pronounced if credit growth is fuelled by lending to high-risk borrowers who are susceptible to financial shocks, such as sharp increases in interest rate or declines in household income. If these adverse scenarios occur, financial institutions may face several challenges, including deteriorating asset quality, increased loan defaults, reduced cash flows, increased liquidity pressures, and the need for greater loan loss provisions. These factors can collectively threaten the financial stability of these institutions and, in acute cases, affect the sector as a whole,” it stated.
The Central Bank stated that during this period of credit expansion, some signs of asset quality deterioration have emerged within the domestic consumer loan portfolio.
The non-performing loans (NPL) ratio grew from 2.5% in December 2023 to 2.7% in December 2024, while the nominal value of NPLs rose by $185.3 million to $1.2 billion, representing an 18.5% increase over the year, the Central Bank stated.
NPLs in the ‘Other Purposes’ loan category surged by 36.4%in the last quarter of 2024, and was the main cause of the spike in NPLs.
Accordingly, NPLs in this category increased by $99.2 million over the year.
The Central Bank stated that labour and consumer market developments provide important context for understanding household financial conditions.
“Despite an expansion in overall economic activity, unemployment increased slightly in the fourth quarter of 2024, which suggests uneven recovery across economic sectors. At the same time, external events such as the ongoing tariff policy shifts, give rise to uncertainty and possible inflationary pressures, which may erode households’ purchasing power. Balancing these concerns, certain trends suggest that household resilience has not been entirely eroded. Recent wage increases stemming from the settlement of several collective bargaining agreements, may offer some relief by bolstering household income and supporting continued growth in consumer credit,” it stated.
The Central Bank said against this backdrop, deposits, which serves as an important indicator of household liquidity and banking sector resilience, remained relatively stable over the past year.
“This stability indicates sustained resilience in the banking sector and confidence in its ability to service its debt obligations,” it stated.
The Central Bank said looking ahead, breaking point stress test results indicate a mixed picture of the financial sector’s resilience to shocks across different consumer loan portfolios in 2024.
“While the resilience of motor vehicle loans weakened slightly over this period, real estate and refinancing portfolios showed improvement, while ‘other purpose’ loans remained unchanged. Considering the above financial stability risk arising from household debt is assessed as ‘moderate’,” it stated.
The Central Bank said the overall risk assessment considers the length of the risk horizon based on ongoing developments in the global and domestic macro-financial system.
Overall, financial stability risks were assessed as “moderate-to-elevated.”
The Central Bank report identified household indebtedness as one of four key risks confronting Trinidad and Tobago’s financial system. The other three risks highlighted are sovereign exposure, cybersecurity, and liquidity.
Volatile liquidity conditions
The Central Bank stated that system liquidity conditions in Trinidad and Tobago remain volatile despite policy measures being implemented.
The Central Bank said liquidity risk in the near term remains “elevated”, warranting continued vigilance.
“In July 2024, the Central Bank reduced the reserve requirement by four percentage points to inject liquidity (roughly $4,000 million) into the financial system in order to alleviate tight conditions, which persisted since the start of 2024,” the Central Bank stated.
“The reduction of the reserve requirement, however, spurred credit growth and funding costs remained elevated. The results of stress tests done in 2024 revealed that banks’ liquidity survival horizons have narrowed in 2024 compared to 2023, from an average of 27 to 25 days, despite the reduction in the reserve requirement. The current system liquidity condition re-emphasises the importance of prudent management and oversight of risks to liquidity, including understanding the potential channels through which shocks to liquidity may emerge,” it stated.
The Central Bank noted that heightened liquidity risks reflect both volatile conditions and evolving dynamics in liquidity management.
It said while the July 2024 policy action boosted average excess reserves, aggregate indicators suggest a slight softening of overall liquidity in the system.
“Monetary policy adjustments contributed to increased system liquidity in 2024. Most notable was the July 2024 reduction in the commercial banks’ reserve requirement from 14% to 10%. This policy action released just over $4 billion into the financial system, facilitating growth in excess reserves held by commercial banks,” it stated.
“As a result, credit supply improved despite relatively unchanged net open market operations (OMOs) from 2023 and a reduction in net domestic fiscal injections (NDFIs). Mixed market reactions and credit dynamics followed the shift in policy. Growth in commercial bank credit to the private sector accelerated amid increased liquidity, but this was tempered by subdued public sector credit expansion (Figure 14),” the Central Bank said.
The Central Bank noted that interbank market activity intensified, with institutions reallocating funds, while the weighted average loan rate rose slightly after a prolonged decline, suggesting a cautious adjustment in pricing strategies as market conditions evolve.
“Despite higher excess liquidity, key prudential liquidity metrics worsened. Both the liquid assets-to-total assets and liquid assets-to-short-term liabilities ratios for commercial banks declined, indicating a reduced capacity to meet liquidity demands,” it stated.
The Central Bank said stress testing further underscored a weakening in the banking sector’s resilience to liquidity shocks in 2024, with the number of days until bank system-wide illiquidity under a shock scenario falling to 25 days, down from 27 days in 2023 when reserves are included.
“A tightening of external financing conditions and extensive borrowing by the Government could pose additional risks to liquidity sustainability. A less favourable global financial environment or a continued rise in interest rates abroad may hinder Trinidad and Tobago’s ability to secure external funding, potentially leading to the Government increasing its reliance on domestic credit sources,” the Central Bank stated.
“This could absorb available liquidity in the financial system, reducing funds for business and consumer credit and drive up borrowing costs. Careful management of government borrowing and close monitoring of global financial developments will be essential to maintain domestic liquidity at levels conducive to the smooth conduct of financial intermediation,” the Central Bank stated.
