By VERNON CLEMENT JONES,Guardian Business Editor,vernon@nasguard.com

A leading investment advisor is suggesting commercial banks will move quickly to close the gap between their arrears and provisioning for that bad debt — a phenomenon exactly opposite to one now in play, according to the Central Bank.

"I expect that in the next reporting period we'll see provisioning grow to reflect the growth in arrears and the state of the present and future economy," said Ken Kerr, head of investment brokerage house Providence Advisors. "If they don't do that then they're very confident about the quality of their loan portfolio or expect a turnaround in the global economy much sooner than everybody else or they could be extremely aggressive in going after borrowers as they start to slip."

The last seems increasingly remote given the most recent Central Bank data.

"Although banks continued to increase their provisions for bad loans," reads the institution's monthly financial report for November 2008, "the faster pace of arrears growth placed the ratio of provisions to total arrears lower at 21.87 percent (down) from 24.41 percent in October and 22.77 percent at December 2007."

The bank doesn't yet appear ready to caution the country's commercial lenders against further widening of that gap, even despite the enormous potential for the rapid acceleration of past-due accounts.

Indeed, that growth has already put on considerable speed, starting in the 2Q 2008.

Asset quality indicators for the month of November show continued deterioration as the value of private sector loans more than a month past due climbed to $749.0 million, or nearly 15 percent of total loans.

So-called "non-performing loans", those past due payments of at least 90 days and on which interest is no longer being collected, advanced to $387.0 million.

Loan loss provisioning is meant to mitigate those kind of current and future losses.

Essentially banks set aside cash in allowance for bad loans by effectively transferring it from the income column to expenses. The overall effect is to tamp down on net income, which of course does little to encourage investor confidence, especially for bank's trading on BISX or another, foreign exchange.

It's nonetheless a bitter pill banks in this jurisdiction have already reached for, with net income slips giving rise, in some cases, to share value dips. Their efforts however may not yet be enough given the growing gap between provision and arrears growth. Still, Kerr is confident banks will ultimately move to bring their provisioning in line with those arrears given probability the economy will see further declines in 2009. A turnaround is predicated on the U.S. recovery not expected until mid-2010.

But banks are just as likely to do something else Kerr alluded to: At least one banker suggests that lenders will sooner move to write down loans in arrears rather than keep them active in hopes of ultimately collecting past due amounts. The move would effectively clear those bad accounts off of a bank's books more quickly and effectively lower provisioning levels, or at the very least keep them from rapidly growing.

Still, the move would come at a cost. The government has urged lenders to work with delinquent borrowers hard hit by the economy and delay shifting non-accruals to collection agencies. It's a request that most assert they've complied with.