A SPECIAL purpose vehicle, set up by the Reserve Bank of Zimbabwe to hive off bad loans from banks, has rescued local banks, particularly indigenous-owned ones, which were struggling with the burden of non-performing loans (NPLs) that could have destabilised them financially.
By Bernard Mpofu
The central bank established the Zimbabwe Asset Management Company (Zamco) to absorb NPLs that had reached alarming levels at over US$750 million soon after the introduction of the multi-currency regime. Zamco has also bailed out some local companies and parastatals that were teetering on the brink of collapse.
Zamco will only absorb loans that are classified by banks as non-performing, secured by mortgage bonds and not those granted to insiders. Government committed to provide funding for the NPL acquisitions in the form of Treasury Bills (TBs) which will have a lifespan of up to 14 years.
Zamco chief executive Cosmas Kanhai told the Zimbabwe Independent this week that the special purpose vehicle had, since establishment in 2014, absorbed NPLs to the tune of US$836 million.
Kanhai said 45% of the current stock of bad loans that were absorbed by Zamco are viable while the remainder should be aggressively pursued before Zamco’s mandate runs out.
Agriculture, at 25%, accounts for the bulk of NPLs housed by Zamco, mining (16%) and manufacturing (15%). The construction sector accounts for the least of the NPLs at 2%.
He said Zamco, whose tenure ends in 2024, was targeting to absorb NPLs worth US$1 billion.
He said Zamco would operate under three phases — setting up, taking over the NPLs and the resolution stage — adding that the special purpose vehicle was now reaching its final stage.
“The loan acquisitions that are done between Zamco and banks are conducted on a willing-buyer-willing-seller basis. This is because Zamco, unlike in other countries that formed similar public asset management companies, does not have legal powers to compel banks to sell their NPLs. The willingness of banks to sell their NPLs to Zamco depends on a number of factors, the main one being whether a bank is willing to accept the purchase price offered by Zamco for the loan, as save for exceptional circumstances, Zamco does not acquire loans at book value, but applies a discount on the face value,” Kanhari said in an interview. “The recovery process begins with Zamco reviewing each NPL account in its portfolio to determine the most appropriate recovery strategy. The respective recovery strategies are then implemented to generate recovery, received in the form of cash and non-cash assets. Ultimately, all non-cash assets will need to be converted to cash. The cash received will be used to pay coupons and retire TBs used in acquiring NPLs.”
He said during the sunset stage of Zamco, an audit would be carried out which will also determine the recovery rate of loans housed by the special vehicle, adding that bad debtors would be named and shamed in this probe to ensure recovery of the funds.
Recently released financial results show that some banks that were perennially making losses returned to profitability after Zamco absorbed the bad loans. Now banks that were burdened with the toxic loans now have TBs on their balance sheets instead of high provisions for bad loans which were weighing down on their operations.
Official figures from the RBZ show that the banking sector remained profitable during the year-ended December 31 2016, with an aggregate net profit of US$181,06 million, an increase of 42,36% from US$127,47 million reported for the corresponding period in 2015.
All operating banking institutions, according to the central bank, recorded profits during the period ended December 31 2016. The increase in profitability, according to the RBZ, was largely driven by lower loan loss provisions in line with improving asset quality, lower interest expenses, as well as continued re-alignment of cost structures at most institutions.
The increase translated to improved average return on assets and equity from 2,07% and 11,03%, to 2,26% and 12,64%, respectively.
Government-owned Agribank, for instance, recorded a historic US$4,8 million net profit for the full year to December 31, 2016, its first in a dollarised environment. This came as the bank’s NPLs were trending downwards.
ZB Financial Holdings also returned to the black in the full year to December 31 2015, after posting an after-tax profit of US$8,9 million for the full year to December 2015. This compares with a net loss of US$9,8 million in 2014.
The group’s chief executive Ron Mutandagayi then said this positive outturn was achieved as a result of a US$10,9 million recovery from previously written off debts.
CBZ Bank, the country’s largest bank by deposits and assets, was exposed to the cash-strapped government through TBs to the tune of US$760 million as at December 31 2016, from US$471 million in the prior financial year.