Independent Comment: Liquidity crisis or credit crunch?

We beg to differ. The conditions in our market are displaying the pathology of a credit crunch, which if unchecked will quickly precipitate into a full blown financial crisis. By persistently referring to our situation as merely a liquidity crisis, our policy-makers are misleading the nation. This continuous misnomer over the last two and a half years has led to policy failure as the solutions prescribed have either fallen short or have been downright inappropriate for the situation. This is akin to a doctor treating symptoms and not addressing the disease. The consequences can be fatal.

Indeed, one can trace this unfolding crisis to a number of regulatory blind spots. In recent times we have seen the Reserve Bank and other stakeholders, through moral suasion, put pressure on banks to increase their Loan to Deposit Ratios. This naturally led some banks to relax their lending criteria and to extend loans to entities that would normally be regarded as sub-prime.

We hear a major bank is sitting on a pile of bad loans, but this is never reflected in their provisions or write-offs. That is quite surprising from a bank that emerged for the ashes and had to have its bad loans housed in a special purpose vehicle. The bank itself and the regulators seem to have a very poor institutional memory that is not serving them well, or they are deliberately turning a blind eye so that history can conveniently repeat itself.

According to RBZ Governor Gideon Gono’s recent Monetary Policy Statement, lending and investment rates quoted by banks have remained unsustainably high since the advent of the multi-currency regime. So have credit spreads, due mainly to persistent liquidity shortages, comparatively high credit demand, high associated risks, limited access to external lines of credit and the absence of an active domestic money market.

 

The absence of a functioning money market has also resulted in the widening of interest rate ranges quoted by the different banks. A liquidity crisis refers to an otherwise sound banking entity finding itself temporarily incapable of accessing the bridging finance it needs to facilitate its cash flow payments and fund operations. The key difference is that a liquidity crisis should be temporary, not sustained.

Often a credit crunch is accompanied by a flight to quality by lenders and depositors as they seek less risky repositories for their money. There is a flight to liquidity by banks that will only lend to highly liquid or creditworthy companies which traditionally would not need to borrow, whilst depositors seek perceived large well-capitalised banks with strong depositor bases and therefore higher relative liquidity. We have already seen the signs, the hoarding of cash by the multinational banks that have a lot more respect for institutional memory, and the increasing inability of some creative banks to perform very basic functions of serving depositors and effecting payments on their behalf.

This situation is particularly grave when one factors in the hitherto unquantified and little-talked-about bad loans that are accruing in the informal and semi-formal credit markets. We have households exposed to multiple debts at very high cost. For instance, civil servants are hopping from one microfinance company to the other, month after month, taking out loans. We have shops and businesses in towns extending credit terms to customers whose credit history they know very little about. We have businesses operating on the mercies of creditors, with landlords not receiving rentals on time if at all. In some cases employees are not being paid and Air Zimbabwe is a clear case in the public domain; there are sure to be many others.

All these issues are now coming to a head, and urgent appropriate policy intervention is required, but the authorities in general, and the RBZ in particular, are keeping these issues in the public blind spot.  The obvious starting point is the formal banking sector and this is where the central bank should start dealing decisively with the unfolding pathology of a credit crunch.

 

The regulator should scrutinise existing loans and start requiring banks to increase their loan loss provisions and charge offs. They should be a lot more conservative in evaluating the financial health of banks and significantly raise the spectre of examiners’ wrath on imprudent lending.

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