Banks lending to remain tight

ZIMBABWE’S banking sector will struggle with weak loan growth over 2016 as a poor economic outlook continues to weigh on asset quality. The situation will be exacerbated by Zimbabwe Asset Management Company (Zamco)’s capacity to absorb more non-performing loans (NPLs) onto its balance sheet.

Shingai Moyo

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The recent confusion over the new Reserve Bank of Zimbabwe (RBZ) policy measures will badly affect banks’ risk appetite. A contraction in the banking sector growth is expected this year as banks take a wait-and-see approach in terms of lending.

This marks a sharp reversal after five years of booming credit expansion in the economy. Loans grew by an annual average of 48% over the period 2010 to 2014. However, in 2015 credit outlays to the private sector remained stagnant, reflecting a cautious approach to lending by banks. A few months into 2016, banks’ lending to private sector fell from US$3,8 billion in December 2015 to US$3,7 billion in March 2016.

The downward or stagnant trend is likely to remain as banks keep reluctant to increase client loan issuance on the back of a weak outlook for the wider economy, escalating concerns surrounding asset quality and the recent cloud hanging over the issue of bond notes as well as payments restrictions.

Economic growth has succumbed to the ravages of a climate of weak commodity prices and poor crop harvests following a year of El Nino-induced drought, worsened by waning confidence following a series of policy inconsistencies.

Given the drive by the RBZ to pressure banks to reduce their NPLs to levels below 5% by December, this will see banks restraining loan provision, fearing an escalation in the weighting of NPLs on their balance sheets and to avoid non-compliance penalties from the regulator.

Banks’ concerns will be further compounded by the saturation of Zamco’s capacity to further absorb the banking sector’s bad debts. Zamco was established with the mission of relieving the banking sector of some of the NPLs burden in order to improve the quality of assets on their balance sheets and encourage credit growth. So far Zamco has had some success with regard to management of NPLs, giving banks some reprieve. By December 2015, Zamco had absorbed over US$400 million in bad debts from the banking sector since it was created in August 2014. This reduced the total proportion of NPLs from peak of 20,5% of total loans in September 2014 to 10,8% in December 2015.

However, how the acquisition of bad loans is funded is of major concern and will also limit Zamco’s ability of further absorption. NPLs are being absorbed through issuance of Treasury Bills (TBs) which is of major concern as it has negative impact on government’s fiscal position. Through Zamco and other state forms of borrowings, domestic credit to the government rose from US$538 million in March 2015 to US$1,7 billion in March 2016.

Zamco is expected to struggle to finance further loan acquisitions under these circumstances. The International Monetary Fund has already expressed concerns over government’s stake in Zamco, and it is unlikely authorities would want to risk prospects of re-establishing relations with the fund and other international financial institutions by spending heavily on supporting the banking sector. It is therefore unlikely that Zamco will be able to grow its balance sheet, while the economy remains in the doldrums.

The recent RBZ monetary policy measures are also posing headwinds to banking sector’s loan growth. The measures have caused panic within the banking sector and among the public, with banks restraining from lending in fear of receiving the loan repayments in currencies other than the preferred United States dollar. Banks are therefore likely to limit their exposure on the private sector and prioritise holding of safer assets such as TBs and bonds.
The banking sector’s TBs and bond portfolio now accounts for 18,3% of total assets, compared to just 5,3% in January 2015, with the outlook for loan growth set to remain unattractive over the rest of the year.

Moyo is an economic and financial consultant. He writes in his personal capacity.