HomeBusinessBanks more cautious as non-performing loans continue rising

Banks more cautious as non-performing loans continue rising

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THE country is facing a credit crunch as financial institutions have resorted to be conservative in their lending.

Victoria Mtomba

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The United States Council of Economic Advisors (1991) defines credit crunch as “a situation in which the supply of credit is restricted below the range usually identified with prevailing market interest rates and the profitability of investment projects”.

It is present when banks are unwilling to lend, especially when a firm with profitable projects cannot obtain credit in spite of low interest rates (lower than the expected marginal products). Credit crunch results in excess demand for credit and hence credit rationing, where loans are allocated via non-price mechanism.

The country is facing a credit crunch at the moment as financial institutions are not willing to lend due to the rise in non-performing loans (NPL) in the sector.

NPLs have risen from 1,6% in 2009 when the country adopted the multi-currency to 20% currently. This means that for every $1 that is borrowed 20 cents will not come back into the banking system.

A local analyst said NPLs have always been there since 1980 and they were insignificant to cause panic in the market. NPLs exist where there is lending because people are bound to fail to repay loans.

When the country adopted the multi-currency in 2009 there was a huge appetite for lending and financial institutions provided loans to individuals and corporates.

The analyst said when the country dollarised lending was offered on the projected growth rates that the country hoped to achieve.
He said when the country dollarised everyone started from zero and people and companies borrowed to start afresh.

The analyst said the projections were high as the economy was on a recovery mode. For instance the country was aiming at a
$100 billion economy by 2030 with growth rates of 7% per annum.

“The projections were given on that basis which was unrealistic. The financial institutions did aggressive lending on the basis of increasing business and market share and demand was there,” the analyst said.

The analyst said the economy is no longer on a recovery mode, but it is now on real growth approach.

Some companies in the market borrowed to recapitalise, but they failed to repay the loans as the country moved from recovery to real growth.

An official from a local bank said the NPLs were further fuelled by the absence of the credit reference bureau which helps in tracking the creditworthiness of borrowers.

Most borrowed from several financial institutions as the institutions did not have any tracking method to see how creditworthy the borrower was.

“Some loans were given on the basis of how one was related to the top management and no proper assessments were made on the borrower,” he said.

Genesis of NPLs

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Zimnat Asset Management head of research division Farai Gwaka, said: “Zimbabwe’s productive and industrial base lost its competitiveness during the era of hyperinflation. In fact our industry has always been uncompetitive, but through government’s protectionist policies a false perception of reality was created about the health and competitiveness of the country’s industrial base.

Whilst our regional and international peers were upgrading their productive technologies, Zimbabwean companies could not invest in new technology because of the acute shortage of foreign currency that occurred during hyperinflation.

“Furthermore there was no incentive to spend millions on new plant and equipment because of the worthless currency and price controls which further crippled businesses. When the country dollarised, reality caught up as several former blue-chip companies have collapsed each passing year. The International Monetary Fund continues to insist that, firstly, protectionist policies do not work in the new global environment, and that Zimbabwe must identify new industries where they have a competitive advantage, to take the economy forward.”

He said the US dollar is a very expensive currency and since 2010 the currency has appreciated by 5% against other major global currencies, whilst during the same period Zimbabwe’s largest trading partner South Africa, has seen its currency depreciate by 35% against the US dollar. Furthermore leading Zimbabwean economists believe that the US dollar in Zimbabwe is at least 20% overvalued.

What this all means is that it is going to be very difficult for Zimbabwe’s industries and exports to be competitive on the global stage, which is another factor that has driven so many businesses in the country out of business.

Gwaka said the cost factors of production under dollarisation are just too high for any business to remain viable in the face of cheap imports from all over the world. The cost of labour has gradually increased since 2009 and the ancient labour laws of the country worsened this problem.

“The cost of capital in Zimbabwe remains very high because of the country’s huge political risk; therefore local firms have also been choked by expensive debt and remain uncompetitive against regional peers who borrow at more competitive rates. Most of the distressed banks in the country have one common feature in their loan book, and that is concentration risk on one or a few large clients. In our review of banking sector loan books we discovered that most of the distressed banks had over 20% of their loan books concentrated in one or a few borrowers. When the large borrowers failed the banks would automatically become distressed. Banks with less concentrated loan books have, since dollarisation, managed to maintain their NPLs at below the market average.”

NPLs not the only factor to liquidity challenges
According to Gwaka NPLs have contributed to the liquidity challenges in the economy because; if a corporate or individual borrows and does not payback what they owe this creates a deficit in the economy. Other factors that have contributed to liquidity challenges include:

Current Account Deficit – The country has since dollarisation maintained a current account deficit as imports have continued to outweigh exports. This has meant that from a current account perspective, more money leaves the country through imports than what is received through exports. Although from an overall balance of payments perspective, capital inflows have helped in reducing this deficit, but still a deficit remains as the country loses more money than it receives.

Consumptive Borrowing – Closely linked to the problem of the growing demand for imports, is the fact that Government, businesses and individuals have since dollarisation spent more on consumptive expenditure than on capital expenditure which enhances the country’s productive capacity.

Therefore the limited capital available for economic stakeholders to exploit has been wasted on consumptive expenditure. For example billions of dollars have been spent since dollarisation towards the importation of secondhand motor vehicles. If these billions had been channelled to a local productive industry, the liquidity situation would be in a better position.

Savings Culture – The decimation of saving during hyperinflation and the general lack of confidence in the country’s financial system has resulted in the demise of the country’s saving culture. Furthermore the uncertainty about the tenure of the current multi-currency regime has also contributed negatively to the country’s savings culture as people fear that they will lose their hard-earned US dollar savings if government decided to reintroduce the Zimbabwe dollar. The absence of domestic long-term capital has meant that banks have had to rely on limited foreign lines of credit to fund their lending activities, which has severely constrained the supply of capital in the market.


Outlook on NPLs

Going forward, Zimnat Research expects NPLs to surpass 20% by year end and to go higher if the current corporate closure trend persists.
Estate Agency Council of Zimbabwe chairman Oswald Nyakunika said the real estate sector would experience more auctions going forward as more people would default.

“The RBZ [Reserve Bank Of Zimbabwe] was mooting the idea of buying NPLs. It is not clear what the impact on property auctions will be. Many banks now prefer lending money to individuals and not companies. Failure by individuals to service these loans is likely to result in more properties going under the hammer,” he said.

Nyakunika said government needed a policy shift that would encourage investment and injection of capital in the economy in general.

“We need to come out of this economic depression,” he said.
Nyakunika said all the sectors are characterised by poor returns as prices plunge and more and more tenants demand some kind of rent reduction. Certainly there has been no upward rent reviews for the last two years. There has been insignificant development taking place. Most residential developments have been largely for own occupation. The sector has also been characterised by lack of mortgage funding. All sales have been cash. This has resulted in lower prices.

“We have also witnessed an increase in rental defaults rate, evictions and high voids. The void rates are above 10% and are likely to continue to increase in the short to medium-term. Companies are closing down so voids are largely a result of that. It is not entirely correct to attribute the problem to high rentals.”

“Most landlords are prepared to link rentals to business performance as a solution, however, it is the companies themselves who turn down the offer of turnover rentals. Generally there is lack of capital injection or investment resulting in many companies closing down,” Nyakunika said.

Nyakunika said for the past four years to 2013 the trend for the property sector has been bullish, but after the 2013 election it started to be bearish.

“We were on an upward trend up until 2013 election. Since then the economy has deteriorated. We have to find some magic policy that will bring back confidence in the economy. We need an inflow of capital and investment into the economy,” he said.

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