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NewsDay

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Factors exacerbating incidence of NPLs

Business
In the mid-term monetary policy statement of July 2015, the Reserve Bank of Zimbabwe (RBZ) set target thresholds for banking institutions to reduce non-performing loans (NPLs) to 10% and 5% by June 2016 and December 2016, respectively.

In the mid-term monetary policy statement of July 2015, the Reserve Bank of Zimbabwe (RBZ) set target thresholds for banking institutions to reduce non-performing loans (NPLs) to 10% and 5% by June 2016 and December 2016, respectively.

Financial sector spotlight with Omen Muza

Making the presentation, RBZ governor John Mangudya noted significant progress towards these targets.

“I am pleased to advise that as at June 30, 2016, significant progress has been made in meeting NPL ratio targets, with 13 out of 19 banking institutions, having met the June 2016 target of 10%. Five banking institutions were already within the December 2016 target of 5%. The remaining banks are instituting various measures to improve the quality of their credit portfolio,” said Mangudya.

The RBZ said the average banking sector’s NPL ratio was now 10,05% and attributed this to the disposal of qualifying NPLs worth $528,4 million to the Zimbabwe Asset Management Company as at June 30, 2016, and continued efforts by bank management to strengthen credit risk management systems, coupled with aggressive recovery and collections as well as workout plans.

Although the RBZ envisages “that the gradual decline in interest rates, enhancement of credit infrastructure (establishment of credit reference system and collateral registry) and ongoing macroeconomic stabilisation measures should result in further improvement in banks’ asset quality,” the threat of NPLs rising still lurks in the economy.

This instalment explores issues that, apart from company-specific issues, militate against the continued fall of NPLs and exacerbate the incidence of bad loans.

Poor performance of agriculture

The below par performance of agriculture is a major contributor to the resurgence of NPLs. For instance, CBZ Holdings, Zimbabwe’s biggest lender with over $1 billion in deposits, booked a 3,8% increase in bad loans due to poor performance in agriculture.

The number of customers in agriculture that failed to repay loans rose sharply, up more than 93% on the back of a 2015/16 agriculture season that was negatively affected by the El Nino-induced drought.

Resultantly, CBZ’s overall ratio of NPLs rose to 7,2% from 6,9%, although it still remained within the banking sector’s benchmark of 10%.

Declining economic activity

Declining economic performance and a dim outlook period have had a marked impact on the ability of some economic players to meet their obligations as they fall due, contributing to rising levels of default in the domestic credit markets.

There is no doubt that sub-par gross domestic product growth, revised to 1,2% from an initial projection of 2,7%, has a dampening effect on the credit worthiness of borrowers.

Cash shortages and nostro funding challenges

Cash shortages, which have become a semi-permanent feature of the economy in 2016, have no doubt affected the ability of some local players to settle their debts, either because of falling cashflows attributed to lower aggregate demand, or because of some borrowers using cash shortages as an excuse for failure to service their debts.

Confederation of Zimbabwe Industries president Busisa Moyo recently said the lack of cash had impeded business activity in the first half of the year, with most businesses recording 15% to 30% reductions in turnover.

“Having a widely accepted medium of exchange improves economic activity so the festive season and opening of schools next year should see a more liquid economy which can actually purchase goods. Swiping and plastic money penetration is still very low and below10% of the active population,” he said.

Internationally, challenges in funding banks’ nostro accounts heighten settlement risk and could result in the inability of banks to service their offshore loan obligations, something that would worsen the country’s already precarious risk profile.

Statutory Instrument 64 of 2016

While Statutory Instrument 64 of 2016 has its salutary effects in terms of the productivity of some local industries, one of its unintended consequences could be an increase in NPLs attributed to cross-border traders for instance.

“A number of banks which lent money to informal merchandisers under short term distribution loans would also be left in the cold. This was easy and quick money for some banks particularly microfinance institutions,” said Zimbabwe National Chamber of Commerce chief executive officer Takunda Mugaga.