Poor asset quality threatens banking sector

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PHILLIMON MHLANGA

Zimbabwe’s banks have burnt their fingers again by lending to low-rated borrowers result­ing in the quality of their assets deteriorating significantly evidenced by the rising average non-performing loans (NPLs) to the total loans ratio, Business Times can report.

The non-performing assets include balances where the principal amount and interest is due and unpaid for 90 days or more, and are likely to be impaired. Interest on these loans is no longer accrued or included in the income of the banks unless the customer pays back.

Several banks have collapsed in Zimbabwe since independence in 1980 due to shareholder and management delinquency. Poorly performing loans, especially insider loans, played a key role in their insolvencies.

Apart from customers enduring tremendous psychological and financial trauma as a result of bank failures, the failure of a single financial insti­tution has the potential to cause widespread dis­ruption to the country’s payments system.

The majority of Zimbabwe’s lenders who are yet to publish their financial results for 2018, told Business Times this week that the deterioration in the asset quality in their balance sheets were the most significant risk to the financial system.

They said borrowers – companies and indi­viduals – were facing difficulties in servicing their financial obligations due to the worsening eco­nomic conditions in the country, resulting in the share of bad and unrecoverable loans increasing. This has made them vulnerable as they may have to write off a big chunk of their loans.

They said the high quantum of stressed assets was a drag that hurts the financial services sector, a situation which is threatening the stability of the sector.

Old Mutual Zimbabwe – which operates CABS, and FBC Holdings which operates FBC Bank, FBC Building Society and MicroPlan (a microfinance unit) – revealed that they were strug­gling to win the war against delinquent borrowers.

Their books show weaker asset quality driven by weaknesses in their loan portfolios. Most of the Old Mutual subsidiaries recorded higher gross impairment ratios.

Non-performing loans for CABS stood at $47.05m, up from $43.3m the previous year, which translates to an 8.06% increase.

FBC Holdings board chairman, Hebert Nkala said: “Asset quality deteriorated as reflected by the increase in the average non-performing loans to the total ratio from 7.1% at the end of 2017 to 8.39% by December 2018.

“FBC Bank’s non-performing loans ratio was at 1.1%, FBC Building Society at 6.1%, while Mi­croplan was at 4.91% as at December 31, 2018.”

Generally Zimbabwe’s banks are reeling under a huge pile of bad loans with NPLs reaching a

peak of 20.45% of bank loans and advances in 2014, largely due to the absence of credit bureaux in the country, but to a lesser decree poor cor­porate practices, deep-rooted risk management deficiencies and chronic liquidity problems were also to blame.

Some banks also engaged in over-trading while some failed to manage risks, with the boards and management failing to put in place strong risk management systems.

But NPLs declined to about 10% at the end of

2016 after the Reserve Bank of Zimbabwe (RBZ) established a special vehicle, the Zimbabwe Asset Management Corporation, to acquire NPLs from the banks to allow them to strengthen their bal­ance sheets and in the process leverage on the bal­ance sheets to access fresh capital to fund produc­tive sectors and spur economic growth.

To enhance the verification process of borrow­ers and enable bankers to assess credit risk and reduce the level of NPLs in the banking sector, the RBZ engaged a renowned credit checker from the Czech Republic called Creditinfo in 2016 to establish the country’s Credit Reference Bureau (CRB).

The CRB system, which consists of a credit reg­istry and private reference bureau, was meant to allow lenders to determine how much and at what rates to lend. It is expected to promote transpar­ency in the economy as there will be greater shar­ing of information, making financial institutions aware of their customers’ financial exposures.

Credit bureaux collect individual, corporate and other legal entities’ credit data from a variety of sources. This is consolidated into profiles avail­able on request to subscribers.

This helps enhance financial stability by pro­moting robust risk management practices, and reducing credit risk. Credit will therefore be given to vetted individuals.

It is expected that once risk is reduced, banks can lend at lower interest rates, fuelling the growth of related economic activities.

But despite the existence of the CRB, NPLs are still on the rise. The central bank has also observed that the ratio of non-performing loans is soaring.

Zimbabwe’s economic growth has slowed since September last year to its weakest pace since dollarisation in 2009. Economic indicators have worsened in 2019 with prices of basic commodi­ties soaring, resulting in annual inflation hitting a high of 66.80% in March, from 5.39% in Sep­tember 2018, translating to a 61.41% increase.

Currently, inflationary pressures appear to be higher than the past few months due to the wors­ening economic conditions.

In its latest World Economic Outlook, the IMF projected that Zimbabwe’s economy would con­tract by 5.2% this year, increasing the country’s economic woes.