COVID-19 will cripple financial institutions: Report

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Mthuli Ncube

LOCAL economic and development consulting firm, Holistic, Empirical and Applied Research Solutions (HEARS) says banks are anticipated to face worsening asset quality and slowing loan growth from the COVID-19 pandemic.

BY TATIRA ZWINOIRA

In a paper titled ‘The coronavirus and the Economy of Zimbabwe’ released last week, HEARS said COVID-19 reduced the ability of economic agents in productive sectors to pay back the loan advances, thus reducing repayment capacity while raising non-performing loans (NPLs).

“Loans to productive sectors of the economy constituted 82,50% of total sector loans as at December 31, 2019. This pandemic reduces the ability of economic agents in productive sectors to pay back the loan advances since the weakening of business and production will reduce loan repayment capacity and raise the rate on non-performing loans (NPLs) and banks’ Asset quality,” said HEARS.

“In overall terms, coronavirus will weaken the balance sheets of banks and threaten the stability of the sector…The banks are anticipated to face worsening asset quality and slowing loan growth as the coronavirus outbreak hits trade and consumer banking because of extended disruption in economic activities.”

HEARS added: “Both businesses and individuals in Africa might find they are uninsured for any COVID-19 impacts as losses related to an epidemic or pandemic would usually not be covered in insurance policies, irrespective of whether the insurance covers business interruption, property damage, product losses or personal life and non-life insurance or even travel insurance”.

According to research conducted by HEARS, the quality of the banking sector loan portfolio continued to improve last year. This was reflected by the decline in the non-performing loans to total loans, from 3,95% as at June 30, 2019 to 1,75% as at December 31, 2019.

The improvement in the NPLs ratio was mainly driven by an increase in total banking sector loans and advances during the period under review, as well as decline in total non-performing loans. The decline was from $245,65 million as at June 30, 2019 to $221,62 million as at December 31, 2019.
However, HEARS said the COVID-19 pandemic was worrisome as it is anticipated to reverse the trend in NPLs to total loans.

“Coronavirus affects the bankable projects negatively by reducing productivity and profitability of businesses in different spheres.

“The projected outcome is increased loan repayment defaulting forcing banks to extend the repayment period, thus reducing excess reserves for the banks,” HEARS said.’

Worsening matters, research shows that both businesses and individuals in Africa might find they are uninsured for any COVID-19 impacts as losses related to an epidemic or pandemic would usually not be covered by insurance policies.

At a post-Cabinet briefing last week, Finance minister Mthuli Ncube said government was working on doing an impact assessment on the impact the COVID-19 epidemic would have on the economy which will be completed soon.

Ncube, however, acknowledged that the impact would be significant and felt across all sectors of the economy.