Reserve Bank of Zimbabwe (RBZ) governor John Mangudya says banks bailed out of the non-perfoming loans (NPLs) crisis by the Zimbabwe Asset Management Company (Zamco), a special purpose vehicle for the assumption of bad loans, must adopt stringent credit risk management systems to avoid the current pitfalls in future.
Local banks are saddled with NPLs amonting to over US$700 million. NPLs are a drag on the economy.
Mangudya told businessdigest this week that the central bank was pushing to ensure banks whose NPLs are assumed by Zamco adopt sound risk management systems and do not end up in the same position.
“Banks helped under Zamco must tighten risk management systems to avoid falling into the same situation. We don’t want this to be a vicious cycle,” he said. “As the central bank, we are helping set up a credit reference bureau to help lower non-performing-loans.”
Banking securities amounting to US$65 million have been sold to various investors under the RBZ’s plan to deal with non-performing loans in the sector.
Mangudya would however not be drawn to reveal the identity of the investors, saying “various investors” had taken up security in “various financial institutions.”
He told businessdigest that he was currently working on his Monetary Policy Statement which would be released “soon” and would some of the related issues.
“There is nothing special about Zamco. Globally this is the trend. What however makes our situation unique is that we don’t have the liquidity to buy these NPLs. If we had a budget suplus, we would just buy the NPLs,” said Mangudya.
He added that Zimbabwe needed to come up with a creative financial structures to deal with the problem of NPLs.
“We need to come up with financial structures to deal with NPLs so that they don’t drag down the economy. That will also give banks the capacity to lend more to business. There is however need to ensure that they don’t end up with non-recurrent problems,” Mangudya said.
Zamco is a special purpose vehicle created to takeover banks’ NPLs, which stood at around US$705 million in June last year.
The RBZ created Zamco to ease the impact of NPLs in the sector and alleviate the liquidity crisis in the country.
This move was also a measure to clean up and strengthen bank balance sheets.
“We want banks to start lending again,” Mangudya said.
The sale of security is set to provide financial institutions with the liquidity to fund valuable projects for the ailingeconomy to rebound.
Mangudya said the high rate of NPLs had potential to adversely affect economic recovery.
This comes against the backdrop of deterorating macro-economic indicators such as low exports, low industrial capacity, high cost of finance, weak current account and trade deficit.
Concurrent with the takeover of NPLs is a validation exercise of the bad loans to determine how much and which loans qualify to be taken off the balance sheets of banks.
The liquidity and credit crunch have highlighted the weak approach to credit risk management taken by many local banks, some of which lent money imprudently under undue political pressure. Some lent irresponsibly following wrong business models. Yet for others it was out of mismanagement and cronyism.
Now banks are seeing that an overhaul of their approach to credit risk is necessary to succeed in the new environment. They need to adapt to manage higher compliance requirements and also to recognise the impact of capital charges on their business strategies.
To balance the increased regulatory cost of credit risk, many banks are looking at methods of risk mitigation, which will mean a greater role for collateral in credit risk management.
However, what banks really want is the option to manage credit risk in a way that allows them to improve performance and remain profitable. To do this, they need credit risk management systems that support decision making in the front office and that can align risk management with improved performance. Banks are searching for the technology systems that will enable them to align credit risk management with performance management and meet regulatory requirements.