The composition of Guyana’s financial sector include the banking system, the New Building Society (NBS), trust companies, finance companies, asset management companies, pension schemes and the insurance companies. The commercial banks, however, dominate the financial sector; and hence, in today’s feature, I have narrowed my focus on the banking system, to begin with.The Bank of Guyana’s half-year report for June 2017 revealed that Net Domestic Credit declined by 4.4 per cent to G0.2 billion, when compared to a 5.4 per cent reduction for the corresponding period in 2016. The net credit position to the Central Government improved G.06 billion to G.6 billion as well, while the public enterprises’ deposits fell by 32.6 per cent to G.067 billion. Credit to the Private Sector fell to 6.9 billion or 1.0 per cent on account of reduction to all sectors except the real estate mortgage, mining, construction and engineering sectors and other services.Net foreign assets of the banking system contracted by 1.1 per cent to US1.9 million at the end of June, 2017 from US1.3 million for the corresponding period in 2016. This outturn was on account of a reduction in the net foreign assets of the Central Bank, despite the net foreign assets of the commercial banks experiencing an increase of 3.2 per cent to US7 million.Turning to the liquidity profile of the banking system, total liquid assets of commercial banks amounted to G2.637 billion, which fell by 7.4 per cent below the period ended December, 2016. This outturn was on account of a reduction in the level of excess reserves held by the commercial banks. Excess liquid assets to required liquid assets ratio was 46 per cent for the period ended June, 2017 when compared to 57 per cent for the corresponding period. Total reserves deposited with the Bank of Guyana stood at .4 billion as at June, 2017, representing a reduction of 12.1 per cent from the level recorded at the end of December, 2016, reflecting a reduction in deposits at the commercial banks.Non-Performing LoansTotal non-performing loans (NPLs) stood at G$30 billion as at the end of June, 2017, representing 12.6 per cent when compared to the corresponding period, from $26.6 billion in 2016. This level of non-performing loans represents 15.7 per cent of the total loans, of which commercial banks’ total loan portfolio stood at $142.7 billion as at June, 2017. Though other indicators, as highlighted earlier, would have shown that the banking system remained relatively sound, such that the statutory liquid assets were in excess by 93.5 per cent or $78.52 billion and net income before tax stood at $7.7 billion. Given that the level of non-performing loans is one that could pose a serious threat to the soundness of the commercial banks’ portfolio, this indicator ought not to be taken lightly. Interestingly, the IMF Country Report for Guyana (2017) highlighted the fact that one domestic bank (alone) accounts for half of NPLs, though it has extended only a fifth of loans.The banking system has certainly been weakened against this backdrop, especially when looked at historically. Meaning, in the last seven years — 2010 to present — the level of non-performing loans has increased at an alarming rate: 309 per cent, from $7.307 billion in 2010 to $29.945 billion in June 2017. This outcome therefore merits the question: what are the determinants of non-performing loans? The answer is twofold; wherein the causations are stemmed from macroeconomic conditions and a bank’s specific factors.The rapid deterioration in commercial banks’ assets quality could lead to substantial losses and reduction of capital buffers. Increases in NPLs would not only increase banks’ vulnerabilities to further shocks, but also limit their lending operations, with broader repercussions for economic activity. This is evidenced by the fact that, indeed, lending has contracted during the period under review, as highlighted earlier, and as a consequence other sectors have recorded deteriorated performances as well, compared to the corresponding periods and recent years.Further, the increases in NPLs have a significant impact on credit as a share of GDP, real GDP growth, unemployment, and inflation in the periods ahead, thus validating the notion that a healthy and sustainable growth cannot be achieved without a sound and resilient banking system.Finally, citing an IMF working paper (2013) with respect to policy implications, “first, given the adverse effect of NPLs in the broader economy, and also in view of the significant contribution of bank-level factors to NPLs, there is merit in strengthening supervision to prevent a sharp build-up of NPLs in the future, including by ensuring that banks avoid excessive lending and maintaining high credit standards.”Beyond this, given that high levels of NPLs pose a burden on the economy, inter alia through limited bank lending, the need for a swift, orderly clean-up of banks’ portfolios is highlighted.