Banks wary of rising NPLs

LIVINGSTONE MARUFU

Local banks fear the default rate on loans will rise again after the Reserve Bank of Zimbabwe (RBZ) hiked interest rates to 200% from 80%.

The ratio of non-performing loans (NPLs) to gross loans stood at 0.94% as at December 31, 2021 against the generally acceptable international threshold of 5%.

Bankers Association of Zimbabwe CEO, Fanwell  Mutogo told Business Times this week that there were growing fears that local companies, battling  thin  working capital, may struggle to repay loans at that rate, resulting in NPLs rising again.

In 2014, the NPLs rose to 20.14% of total loans in the banking sector, threatening the viability of the sector.

Mutogo said the sector is happy that it is now “lending at a range above inflation rate of 192%”, the first time it has done so in years as the industry has been lending at a negative interest rate.

“But, we are worried about the companies’ ability to repay loans at 200%, given firms’ working capital, very few are able to repay resulting in NPLs. The companies may be forced to astronomically increase prices to be able to pay and this could cause inflation in the process,” Mutogo said.

He said some firms which have good reputation were getting reduced interest rates and have the ability to repay.

Farmers and small to medium enterprises were also using concessionary rates of between 100% and 120% in order to continue producing.

“We have some companies that are getting reduced rates. These have a clean record with banks but farmers and SMEs are strictly getting concessionary rates as they require lower interest rates to remain in the game,” Mutogo said.

He said farmers are not very active most of the time hence they need reduced rates for the banks to recoup their money from growers.

“We may charge them high interest rates but we will have NPLs and it will not help us,” Mutogo said.

Confederation of Zimbabwe Industries president Kurai Matsheza said the high interest rates were affecting business operations.

He said most businesses have increased prices to survive these onslaughts in the economy hence there will be some difficulties in stabilising prices.

“The increase in interest rates will push up the cost of doing business, this has happened and prices of goods in shops continue to rise relentlessly,” Matsheza said.

The CZI boss said some banks have started removing overdraft facilities.

It also means that most local companies will find it difficult to start new projects or expand as they will not easily afford to take out credit, due to higher charges.

Recently economist Gift Mugano said : “There is no bonafide business which has the capacity to absorb a 200% interest rate where it can get good margins unless there is something that business is doing to survive.”

“The consumers will concentrate on basic commodities which have no option but to buy them but volumes of purchasing will certainly go down thereby affecting companies that manufacture those goods.”

The Reserve Bank of Zimbabwe was in 2014 forced to establish the Zimbabwe Asset Management Company (ZAMCO) to deal with the NPLs and clear the balance sheets of banks to be able to lend again.

The setting up of ZAMCO came amid fears that banks would cut back on lending which is critical in lubricating the wheels of the economy.

ZAMCO says NPLs are a drag on the performance of banking institutions through reduced earnings and loss of capital. It said a number of bank failures in Zimbabwe were a result of high levels of non-performing loans. Saddled with high NPLs, banks are not keen to extend lending to the productive sectors of the economy, thereby affecting job creation and economic growth, it said.