Lenders warn of rising default rate

PHILLIMON MHLANGA

Asset quality in Zimbabwe’s banking sector could deteriorate again, largely due to the adverse effects of high interest rates and harsh operating environment, players in the sector have warned.

The sector’s asset quality as reflected by the average non-performing loans (NPL) to total loans ratio, stood at 1.5% at the end of June this year, against a generally acceptable international threshold of 5%.

But the Bankers Association of Zimbabwe (BAZ) president, Mehluli Mpofu, fears the default ratio could rise beyond the international benchmark again due to the high interest rate and harsh operating environment.

An NPL is when payments of interest and principal debt are overdue by 90 more days.

The Reserve Bank of Zimbabwe (RBZ) recently raised interest rates to 200% from 80%.

Mpofu said weak asset quality could negatively affect banks’ capital.

“We expect further deterioration due to potential increase in  loan impairments caused by  harsh operating environment and high interest rate, among many other challenges ,” Mpofu told Business Times.

There has been a continuous decline in the banking sector’s NPLs  from 10.82% in 2015  to 0.31% in December 2020.

But, it peaked to 1.57% in March this year, before declining to 1.50% at the end of June this year, according to official data obtained from the RBZ.

Commenting on the marginal decline, an investment analyst and researcher with FBC Securities and Erccro Consulting Inc, Enock Rukarwa, said banks adopted a sound credit risk management system and internal controls to minimise potential  NPLs against the background of a challenging operating environment.

“The marginal decline from March level to 1.50%  in June was due to continuous adoption of sound risk management frameworks,  increasing aggregate loan book and investment in risk-free assets such as Treasury Bills, and government bonds, among many other assets,” Rukarwa said.

Aggregate banking sector loans and advances increased to ZWL$603bn as of June 30, 2022, from ZWL$229.94bn reported at the end of December 2021, largely attributed to the translation of foreign currency-denominated loans.

Foreign currency-denominated loans constituted 65.87% of total banking sector loans, during the reviewed period from 36.87% reported  in December 2021.

During the period under review, financial intermediation as measured by loans to deposit ratio, improved from 48.27% recorded as at December 31, 2021, to 53.69% as at June 30,  2022.

The banking sector continued to support the productive sectors of the economy as evidenced by loans to the productive sectors constituting 76.29% of total loans as at June 30, 2022, according to RBZ official data.

The banking sector reported an aggregate profits of ZWL$181.25bn  in the six months to June 30, 2022, reflecting a 12 fold increase from aggregate profits of ZWL$15.09bn reported in the corresponding period in 2021.

Growth in banking sector income was largely spurred by non-interest income, which constituted 79.03% of total income .

Non- interest income comprised mainly revaluation gains from investment properties, fees and commissions as well as translation gains on foreign currency denominated assets.