THE Reserve Bank of Zimbabwe (RBZ) this week further reduced statutory reserve thresholds as it reacted to the threat of a financial sector crisis first
reported by the Zimbabwe Independent in May.
The reduction in statutory reserve ratios was aimed at precluding a top banking institution from releasing a profit warning that might have served as an indictment to a raft of central bank policies which banking sector executives feel have significantly undermined their banks’ profitability.
Sources said this week that Barclays Bank (Zimbabwe), the third largest bank by assets, had indicated that it would issue a profit warning to shareholders after the central bank failed to address concerns raised by the top five commercial banks that costly treasury bill (TB) portfolios accumulated under the central bank’s tight monetary policy were wiping out accumulated capital.
The Independent reported in May that the country’s financial sector was on the brink of bank failures, with five key banking institutions reportedly sitting on costly TB portfolios that could wipe out accumulated capital.
The situation at the top five banks — Standard Chartered, Commercial Bank of Zimbabwe (CBZ), Barclays, Stanbic and Zimbabwe Banking Corporation (Zimbank) — had been compounded by the high statutory reserve requirements for commercial banks which have shifted huge amounts of deposits from the banking system, transferring them to the RBZ.
The commercial banks are holding huge TBs in their portfolios, most of which had yields averaging around 300%.
However, the banks are financing their positions at rates in excess of 850% through the overnight accommodation facility of the central bank, creating huge gaps between their financing costs and the cost of their TB assets.
The TBs are difficult to redeem for cash until maturity, and this had forced banking institutions to seek recourse from the central bank through the overnight accommodation window to fund short positions.
Documents seen in May indicated that the big financial institutions were each picking up debts as high as $1 trillion daily through borrowings from the RBZ, with daily interest charges in excess of $500 billion daily.
A memorandum from the Bankers’ Association of Zimbabwe (BAZ) had warned that developments from the RBZ’s monetary policies were “a major concern to the industry and will, if not addressed urgently, precipitate bank failures” before the end of June.
The high statutory reserve ratios had meant that commercial banks were effectively paying out 58% of all their deposits to the RBZ at no interest.
Of the balance from the deposits, 76% has been locked up in TBs, leaving the commercial banks in the lurch.
The central bank on Monday reduced statutory reserve ratios for commercial and merchant banks from 50% on demand or call deposits to 47,5% and from 40% on savings or time deposits to 37,5%.
This was after the RBZ had made a similar reduction in statutory reserve ratios from 60% for call or demand deposits to 50% and from 45% on time or savings deposits to 40% on June 19.
In his latest announcement to banking sector chief executives on June 29, RBZ governor Gideon Gono said the central bank was “making these progressive reductions in the spirit of releasing more financial resources on banks’ funding positions so as to enable the industry to increase its contribution to the economic turnaround programme”.
He had also indicated in his earlier notice to bankers that the reduction in statutory reserves was meant “to reduce the cost of funding for banks”.
Sources indicated that the central bank had made the decision to lower statutory reserve ratios after Barclays Bank had indicated it would take the unusual step of issuing a cautionary that would give details of the impact of the central bank’s policies on its margins.
Gono also discontinued the two-year special TBs into which banks were forced if they remained with surplus cash by end of business as part of measures to restore viability in the banking sector.
Under the new measure, surpluses will now be accommodated in 30-day non-negotiable certificates of deposits (NNCDs) at zero interest.
To further enhance viability of the commercial banks and curtails bank failures, Gono has increased returns on all outstanding two-year TBs, making them more marketable and tradable on the secondary market. The interest rate on all outstanding two-year TBs has been adjusted upwards to 375%, from levels of 200%.
A central bank official had written to bankers on June 21 informing them that the effective date for the new interest rate of 375% on outstanding two-year TBs would be April.