Non-performing loans balloon

HARARE - Zimbabwe's non-performing loans have grown substantially by more than 10 percentage points to over 15 percent since dollarisation in 2009, indicating stagnation in the economy.

Statistics released recently by the World Bank have shown that non-performing loans in the country have increased from about 3,2 percent in March 2009 to 15,3 percent in May 2013, while during the same period liquidity ratio declined significantly from approximately 48 percent to around 27 percent.

A non-performing loan is a sum of borrowed money upon which the debtor has not made his or her scheduled payments for at least 90 days.

Market observers say from the recent announced financial results, banks have been reporting high credit defaults and the same is confirmed by credit retailers as well as companies that are supplying products and services on credit.

NMB Holdings saw its non-performing loans almost doubling to 22,8 percent of its loan book in the first half of the year, a development management said reflected the stagnation and the liquidity problems facing the economy.

Poor credit quality affects liquidity because if a borrower cannot pay when due, the lender has to fund that position.

“The more non-performing loans a bank has the poor its liquidity becomes. In other words, lenders are creating or worsening the liquidity problems by lending to people or companies of poor credit standing in search of high returns,” said Claire Masunda, an independent economist.

She noted that the situation is being exacerbated by that the central bank which cannot create some liquidity through monetary policy intervention since it cannot print the foreign currencies we are using in primary transactions.

“In others countries, for instance in the United States where quantitative easing is being used, liquidity injection from government becomes a mitigating factor in the sense that it brings in new money which is used to meet these commitments,” she said.

Another economist with Capital Bank said non-performing loans in the country are being caused by the weak state of the economy — worsened by poor financing decisions by borrowers — lack of client knowledge, multi-borrowing, weak internal systems, high lending rates, over dependence on balance sheet strength and inadequate supervision by the central bank.

“Conceivably, banks have learnt their lessons and implemented several internal measures to deal with the non-performing loans. These include, among others, debt restructuring, foreclosures, tighter loan granting and increased borrower monitoring,” he said.

The African Development Bank (AfDB) in its August monthly economic review said since March 2013, individuals have been receiving the largest share of loans and advances compared to productive sectors.

“In order to foster positive economic recovery, more loans and advances should be advanced to the productive sectors,” said the regional banking group adding that market indications are that some individuals borrow to finance their small and medium enterprises, which constitutes productive borrowing.

“The large share of individual loans and advances is an indication that although individuals are charged higher interest rates than corporates, interest rates are not high enough to deter individual borrowing.

“Individuals might also be less interest rate sensitive than corporates, or banks might have more incentive to lend to individuals,” said AfDB.

The continental financial institution noted that local banks could also be lending more to individuals on the basis of spreading risk by extending small loans to a large number of individuals as opposed to lending large amounts to a few corporates.

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Comments (1)

So what is the regulatory benchmark level for NPLs and what is the approach to NPL resolution? At 15% of total loans, it means about US$500 million is locked in bad assets (not cirulating), and effectively, this militates against the much needed credit expansion because it locks out liquidity and perpetuates cautious lending by banks.

Black Swan - 7 October 2013

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