Non Perfoming Loans choking economy

HARARE - Titus Ndebele took out a loan with one of the local banks and bought a car; within four months he was retrenched from his job and was left with the nightmare of having to service the loan without a steady income.

Ndebele’s predicament is not peculiar to him alone; most Zimbabweans are facing this difficult situation leading to an upsurge of Non-Performing Loans (NPLs) in local banks.

According to the Reserve Bank of Zimbabwe (RBZ) statistics, the bad debts have risen from 1,6 percent in 2009 to 18,5 percent ($705 million) as at June 2014.

While the central bank recently crafted a special purpose vehicle to house NPLs, analysts say the move is doomed.

The Zimbabwe Asset Management Company (Zamco), being touted by the central bank governor John Mangudya, is according to analysts “a case of the central bank shooting itself in the foot”.

“We have set up the board… chaired by Bart Mswaka,” Mangudya said at a financial sector conference held recently.

“About $60 million (NPLs) has gone through Zamco. In regards to Zamco application, uptake has been great,” he added.

Zimbabwe has a lot of people scared because of yesterday’s deeds.

Some of the deeds might have been a result of miscalculated investments that backfired or heavy debts incurred while funding non performing entities.

At worst, the debts were incurred as a result of funding lavish lifestyles. Zimbabwe at present is grappling with NPLs which are choking the economy.

Harare based analyst Issis Mwale told the Daily News on Sunday that government should have first enacted a law governing Zamco, to outline its parameters.

“In countries where this has been done, a Special Purpose Vehicle (SPV) Act is first enacted. It ideally grants tax exemptions and fee privileges to SPVs which acquire or invest in non-performing assets, in our case the RBZ,” Mwale said.

“Seeing as this particular SPV was not enshrined in any law, it will become one of government’s corporations which will only waste tax payers money,” she said.

However, the Bankers Association of Zimbabwe (Baz) says the inception of Zamco will help ease the liquidity crisis in the country.

Sam Malaba, the association’s president, is on record saying the vehicle is very important for the banking and financial sector.

“Baz welcomes this development which has potential to enhance financial intermediation and credit availability in the economy. Banks are currently weighed down and saddled by non-performing loans,” he said.

“The special purpose vehicle will enable banks to create capacity for new lending, hence ameliorating the current liquidity challenges facing the economy for the benefit of the productive sectors,” Malaba added.

Although the central bank outlined Zamco will only take over bad loans secured against recoverable collateral, another analyst noted this was only a relative condition.

“We have heard of cases were banks have issued out loans and advances without proper collateral documentation, how exactly do they intend to keep track of all the collateral… Yes, as you say they claim to have a database but have you seen it?”

“This is just a condition to cushion big guns that have loans using tax payer’s money,” said another analyst, who preferred anonymity.

The Mswaka-led Zamco, comes as the banking sector’s NPLs have reached worrying levels after escalating to an average 20 percent in October from 18 percent in June this year.

“We are now collecting information from the banks so that we can put it into a database which will be used by Zamco to assess the loans.

“We want to avoid moral hazards, so we need information on all the NPLs. We don’t want to be just buying NPLs when the loans were abused by someone else,” Mangudya said.

Early this year, the RBZ created Zamco to ease the impact of NPLs in the sector and ease the liquidity crisis in the country. This move was also a measure to clean up and strengthen bank balance sheets.

The shift is set to provide financial institutions with the liquidity to fund valuable projects for the economy to rebound.

However, Mangudya recently forecasted that the liquidity crisis is set to tighten due to banks’ reluctance to lend in the wake of “worrying non-performing loans (NPLs)”.

“Liquidity is going to be tighter, not because there is no money, but the banks are now scared to give out money and all the money is sitting in the banks,” Mangudya told a Zimbabwe National Chamber of Commerce and Econometre Global Financial conference in the capital last week.

“When the US dollar was introduced, people and banks alike thought they had arrived. They (banks) lent people money, but you as business are not repaying the loans,” he said.

He said the “NPLs have been increasing on a monthly basis even without new money being given out”.

Mangudya added that the poorly performing economy and “financially undisciplined” Zimbabweans had forced banks into a state of “perpetual mistrust”.

“They are in it for the business, so after the behaviour being exhibited with so many companies filing for judicial management who can blame banks for the stance they have taken?” he questioned.

Mangudya said loans in issue stood at $4,05 billion as at September 30, 2014, while deposits rose from $1,36 billion in December 2009 to $5,2 billion in October 2014.

Globally, NPLs have been a hindrance to the financial sector and economic stability, and growth of economies.

According to the central bank chief, the RBZ was cognisant of the problems posed by high levels of non-performing loans which exceed the international benchmark of up to five percent and can be a threat to financial stability and economic growth.

“As such, addressing the problem of non-performing loans is essential in order to invigorate the Zimbabwean economy.

“The resolution on non-performing loans is therefore a necessary condition to improve the economic status of the country and to address the vicious circle of low economic growth, company closures and banks vulnerability,” he said in his maiden monetary policy.

 

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