The high level of nonperforming loans (NPLs) in the Caribbean has been, in large part, a legacy of the global financial crisis, but their persistence owes much to the weak economic recovery in the region, as well as to structural obstacles to their resolution.
This according to a recent working paper released by the International Monetary Fund, looking at the Determinants, Impact and Strategies for Resolution.
According to the paper, a comprehensive strategy is needed to address these impediments to sever the adverse feedback loops between weak economic activity and weak asset quality.
The paper finds that NPLs are a drag on Caribbean growth and macro-financial links are strong.
However, a deterioration in asset quality hinders bank lending and dampens economic activity, undermining, in turn, efforts to resolve problem loans.
The IMF in its working paper said that a multifaceted approach is needed, involving a combination of macroeconomic policies to support growth and employment; strong supervisory frameworks to ensure macro-financial stability and create incentives for resolution; efforts to address informational gaps and deficiencies in insolvency and debt-enforcement frameworks; and development of markets for distressed loans.
The institutional capacity constraints require coordination of reforms within the region and support from international organizations through capacity-building the paper needed.