Chart 2.1: Risk Weighted Capital Adequacy Ratio

Chart 2.2: Ratio of Tier 1 and Tier 2 Capital to Risk Weighted Assets

Table 2.1: Domestic Banks: Risk Weighted Capital Adequacy Ratio

Table 2.2: Maturity Pattern of Foreign Currency Assets and Liabilities

Under section 21 of the Banking Act 1988, banks are required to report to the Bank of Mauritius on a quarterly basis credit facilities extended to any one customer or group of closely related customers where such facilities exceed 15 per cent of their capital base. Where credit facilities exceed 30 per cent of a bank’s capital base, the bank is required to inform the Bank of Mauritius prior to the extension of the facility. In case the credit facility is to exceed 50 per cent of its capital base, the bank is required to obtain the prior written permission of the Bank of Mauritius. No aggregate limit has so far been imposed on large exposures taken by individual banks but this prudential measure is currently being envisaged given the increasing exposures taken by individual banks.

Credit concentration in the domestic banking sector continued to be high. As at 30 June 1999, total fund and non-fund based facilities, beyond the threshold of 15 per cent of a bank’s capital base, totalled Rs23,965 million, representing 32 per cent of the overall on and off-balance sheet commitments of domestic banks. The corresponding ratio in June 1998 was 29 per cent.

The Guidelines on Income Recognition and Classification of Loans and Advances for Provisioning Purposes require that banks set aside specific provisions for advances representing more than a normal risk of loss. This determination is supported by specific minimum criteria based on the number of days the instalments of principal and/or interest are overdue.

The guidelines also require that banks maintain a minimum general provision of not less than one per cent in respect of their performing advances.

In view of the preponderance of credit activity in banking operations in Mauritius, the determination of non-performing loans and provision for bad and doubtful debts is an important tool of risk assessment and risk management for banks.

Domestic banks' non-performing advances increased from Rs2,717 million in 1996/97 to Rs3,496 million in 1997/98 and further to Rs4,774 million in 1998/99. As a percentage of banks' total advances, their non-performing advances went up from 7.8 per cent in 1996/97 to 9.0 per cent in 1998/99.

In the year ended 30 June 1999, provisions (inclusive of general provisions) for bad and doubtful debts amounted to Rs1,834 million as compared to Rs1,760 million in the preceding year. As a proportion of banks’ total advances, the amount of outstanding provisions dropped from 3.5 per cent at the end of June 1998 to 3.0 per cent at the end of June 1999.

The charge to the income statement of the banking sector for bad and doubtful debts dropped by 15 per cent from Rs438 million to Rs374 million for the period ended 31 March 1999.

Table 2.3 shows the charge for bad and doubtful debt and total advances of domestic banks for the period 1995/96 through 1998/99.

The financial year of three domestic banks ends on 30 June, that of one bank on 31 March while the remaining six banks close their accounts on 31 December. Pre-tax profits of domestic banks amounted to Rs1,953 million for 1998/99, up by 39.1 per cent or Rs549 million from those of 1997/98.

Table 2.4 shows the consolidated profit performance of all domestic banks. Their consolidated profit performance, combining the results for their various financial year-ends, is shown under the caption 1998/99 with comparative data for 1997/98.

Charts 2.3 and 2.4 depict the components of income and the components of net interest income for domestic banks, respectively, for the period 1994/95 through 1998/99.

The increase in net interest income was a major contributor to the improved profit performance of banks for the period ended 31 March 1999. Interest received on advances and investments net of interest paid on deposits and borrowings amounted to Rs2,656 million for the period ended 31 March 1999 as compared to Rs2,375 million for the period ended 31 March 1998.

The above performance was achieved in spite of the decline in the interest spread from 5.83 per cent in 1997/98 to 4.90 per cent in 1998/99.

Other income, consisting principally of profits from foreign exchange transactions, fee income and income from investments, increased by Rs388 million, or 28.1 per cent, to Rs1,767 million in 1998/99. The main contributors to this increased profitability were a rise in both foreign exchange activity and investments.

Another measure of profitability is the return on average assets of domestic banks. The pre-tax return on average assets for all domestic banks increased from 2.07 per cent in 1997/98 to 2.45 per cent in 1998/99. However, the performance of individual banks was mixed, ranging between 0.52 per cent and 4.25 per cent. Four banks had a pre-tax return of over 2.0 per cent during 1998/99.

The post-tax return on average equity of domestic banks also improved significantly. In 1998/99, the return was 20.15 per cent as compared to 15.67 per cent in 1997/98. As for individual banks, the post-tax return on average equity in 1998/99 ranged between 4.51 per cent and 26.43 per cent as compared to the range of 5.56 per cent and 31.86 per cent in 1997/98.

Chart 2.5 shows the return on average equity and on average assets for domestic banks for the period 1994/95 through 1998/99. Table 2.5 provides a summary of domestic banks' financial performance in 1997/98 and 1998/99.

Chart 2.6 shows the consolidated operating profit and the profit after tax of domestic banks for the period 1994/95 through 1998/99.

Offshore banks in Mauritius provide a variety of services in currencies other than the Mauritian rupee. These services include deposit-taking, foreign exchange dealing, lending, trade financing, fund management, offshore trust and securities custodial services. The offshore banking sector was established following the Government strategy to enhance and facilitate the provision of international financial services and to develop Mauritius into a full-fledged international financial centre.

The offshore banking sector continued its sustained growth in business in 1998/99. Total assets of offshore banks increased by 152 per cent to US$2,574 million at the end of June 1999, higher than the growth of 28 per cent and 44 per cent recorded in 1996/97 and 1997/98, respectively.

Offshore banks increased their placement of funds with other banks by US$896 million to US$1,624 million at the end of June 1999. Lending to non-bank customers also went up by US$604 million to US$830 million at the end of June 1999. Their investments almost doubled from US$59 million to US$104 million during the same period.

Borrowings from the international money market and deposit-taking from non-bank customers acquired greater significance as sources of funds for offshore banks in 1998/99. Borrowings increased from US$159 million in 1997/98 to US$1,068 million in the year under review. Deposits grew by US$440 million, or 67.6 per cent to US$1,091 million, at the end of June 1999.

The financial year-end of seven offshore banks is 31 December, of two offshore banks 31 March, while the tenth offshore bank started operations on 1 June 1999. The consolidated position of profit and loss accounts of all offshore banks, involving different financial year-ends, is referred to as 1998/99.

Interest earned by offshore banks on placements with other banks increased by US$48.6 million from US$28.6 million in 1997/98 to US$77.2 million in 1998/99 and accounted for 68.6 per cent of gross income. Interest on loans and advances to non-bank customers increased by US$12.4 million to US$24.1 million from US$11.7 million during the same period. Interest earned on investments in 1998/99 remained approximately the same as in the previous year at US$2.7 million. Other income, including fees and commission, amounted to US$8.5 million in 1998/99 and represented 7.6 per cent of gross income.

As a result of heightened money market operations of offshore banks, interest paid on money market borrowings increased by US$14.6 million to US$22.7 million in 1998/99. Interest paid on deposits of non-bank customers was US$40.3 million as compared to US$24.6 million in the previous year.

The nine offshore banks that were in operation during the whole year recorded net profits. Aggregate net profits for the offshore banking sector rose to US$43.4 million in 1998/99, from US$10.1 million in the previous year.

The aggregate pre-tax return on average total assets for the offshore banking sector was 3.11 per cent in 1998/99 as compared to 1.39 per cent in 1997/98. For individual banks, such return ranged from 0.56 per cent to 9.02 per cent in 1998/99.

The aggregate return on average equity for the offshore banking sector, however, declined from 10.2 per cent in 1997/98 to 8.0 per cent in 1998/99, primarily because of the additional capital injected by the offshore banks.

Table 2.6 gives the profit performance of offshore banks from 1996 through 1998/99. Chart 2.7 shows the total funds and net profit of offshore banks for the years ended December 1992 through 1998/99. Chart 2.8 depicts non-bank customer deposits, loans and advances to non-bank customers, and placement with other banks for the years ended December 1992 through 1998/99.

The critical role of basic infrastructure, including IT based systems, for carrying out financial transactions need not be over-emphasised. Recognising the threat posed by the Year 2000 Problem, chiefly in view of sectoral and international interdependencies, the Bank of Mauritius launched as from May 1997 an awareness campaign regarding this problem. The technical and business issues involved were highlighted, calling for an early remediation of the latent problem in banks’ systems with a view to guaranteeing operational continuity and maintaining a high level of confidence in the banking system of Mauritius.

The awareness campaign proved to be a success. As from July 1997, the Bank started monitoring implementation programmes of banks on a monthly basis at the level of individual institutions. A standard questionnaire, related to identification, planning, implementation, testing and certification by suppliers of Year 2000 issues, was used for this purpose.

Monthly progress monitoring of individual banks was linked initially to a target date of 31 December 1998 for Year 2000 compliance by the entire banking system. The speed of implementation of the Year 2000 project by individual banks varied depending on the size of the banks in some cases and the seriousness with which the management of some other banks addressed the issue. Inevitably, the rather tight deadline of 31 December 1998 was missed and was extended thereafter successively to 31 March 1999 and 30 June 1999 in the light of progress achieved by individual institutions.

By March 1999, 10 out of the 20 banks in operation, representing 39 per cent of the total banking business of the country, reported having shifted over the full range of their operations to their Year 2000 compliant version. By June 1999, the number of banks having completed and changed over to the compliant version increased to 19 and the last bank to report that it had shifted over to its compliant version did so by mid-July 1999. Thus, all banks operating in Mauritius have reported that they have completed work on the project, tested and shifted over to their Year 2000 compliant versions.

As part of its supervisory work, the Bank of Mauritius has, in the course of its ongoing on-site examination of banks, been overseeing, together with the management of banks, the functioning of banks’ Year 2000 compliant versions.

On the whole, the Bank is satisfied that remediation of the systems has been satisfactorily carried out by individual banks and that the risk posed to the financial infrastructure of Mauritius as regards the banking system has been properly addressed.

The Bank of Mauritius embarked on its Year 2000 project in May 1997. In the past two years, all its systems, including non-IT items, have been reviewed and remedial action taken followed by testing. Suppliers of key system have provided statements to the effect that their products in use in the Bank’s system are Year 2000 compliant. The Bank achieved full compliance by 30 June 1999.

While adequate steps have been taken by banks to address the risks of material disruption of their operational infrastructure, there remains a possibility that unanticipated glitches may arise either in the internal systems of banks themselves or due to problems originating outside of banks, which may affect business continuity associated with the millennium date change. Accordingly, parallel actions have been initiated to mitigate such risks and to contain the consequences of any disruption occurring due to such factors so as to ensure business as usual past the millennium date change.

Two banks have completed their contingency plans to cope with such emergencies. The rest of the banking system is due to have completed their contingency plans not later than 30 September 1999. As regards the Bank of Mauritius, its contingency planning is in the process of being finalised whereupon testing will be proceeded with. The deadline for the Bank’s contingency plan is the 30 September 1999.

The Bank of Mauritius has taken other actions in order to increase the banking system’s preparedness for Year 2000 compliance. Thus, steps have been taken to declare 31 December 1999 a bank holiday under section 41 of the Banking Act 1988. The Bank has also made arrangements for an ample supply of banknotes to meet the needs of the millennium change and is working, in this connexion, in close consultations with banks to ensure that any extra supplies of banknotes in response to demand are duly met and liquidity issues are addressed well in time. Adequate measures have accordingly been taken to ensure a smooth transition to the new millennium.

Banking supervisors from the sixteen supervisory authorities of the eastern and southern African regions are grouped together in the Eastern and Southern Africa (ESAF) Banking Supervisors Group as from 1993.

The Bank of Mauritius hosted the Fourth Senior Bank Supervisors World Bank/IMF Workshop of the Eastern and Southern Africa Banking Supervisors Group from 14 to 18 June 1999 and the Seventh Annual General Meeting of the ESAF Banking Supervisors Group from 21 to 23 June 1999.

The principal objectives of the ESAF Supervisors Group are to promote and enhance the quality and nature of banking supervision and to harmonise banking supervision practices in the region. In line with these objectives, the main focus of the workshop was on the challenges posed by the changing global banking environment.

The workshop was conducted by resource persons from the World Bank and the IMF and was attended by twenty-eight delegates from 15 countries in the ESAF region. Topics covered included:

• policies for the granting of banking licences and the management of distress in the banking sector;
• measurement of capital adequacy with respect to credit and market risks, and the Basel proposal for the review of the 1988 Capital Accord;
• criteria for assessing compliance with the Core Principles for Effective Banking Supervision; and
• asset quality and methodology proposed for arriving at the accurate disclosure of the value of loans and advances in the books of a bank.

The workshop was of assistance in keeping the banking supervisors in the ESAF region abreast of the latest developments in the field of supervision of banks.

The Annual General Meeting of ESAF was held in Mauritius from 21 to 23 June 1999. Challenges to banking supervision in the next millennium was one of the key subjects discussed in the course of the AGM as well as actions taken/to be taken so as to achieve regional harmonisation of supervisory standards. Supervisors from the following Central Banks will be members of the ESAF Executive Committee during the coming two years: Mauritius (Chairperson), South Africa (Secretariat), Zimbabwe, Tanzania, Botswana and Zambia.