NPLs grow amid economic malaise

DESPITE a significant growth in earnings, Zimbabwe’s banking sector remains fragile due to rising non-performing loans (NPLs) as the credit risk remains high on account of deteriorating macro-economic conditions as shown by latest market statistics.

By Taurai Mangudhla

Although total banking sector loans and advances marginally decreased from US$$3,69 billion reported as at December 31 2016 to US$3,59 billion as at March 31 2017, NPLs marginally deteriorated to 8,39% as at March 31 2017 compared to 7,87% at the end of December 2016, according to the Reserve Bank of Zimbabwe (RBZ)’s banking sector report for the first quarter of 2017.

Analysts say growing bad loans at a time the loan books are shrinking signals tight economic conditions that are making it difficult for loans to be honoured, while banks are becoming more cautious with their lending to manage the risk.

Thousands of companies have shut down in recent years, costing thousands of employees their jobs and putting pressure on disposable incomes. This has seen Zimbabweans spreading their dollar thinly while companies are struggling to make sales.

The central bank said banking sector loans have generally been on a downward trend since September 2015, largely as a result of a reduction in lending by most institutions due to perceived high credit risk.

“There has been a general improvement in the banking sector NPL ratio over the past years, from a peak of 20,45% as at 30 September 2014 to 8,39%, as at 31 March 2017. The ratio, however, marginally deteriorated from 7,87% as at 31 December 2016. The deterioration is largely attributable to a disproportionate reduction in total loans and advances compared to increase in NPLs,” said the RBZ.

As at March 31 2017, lending to the productive sectors accounted for 67% of total loans. Loans to tourism, agriculture and manufacturing sectors dominated the distribution of productive loans as at 31 March 2017. The reduction in lending rates for the productive sector, including mortgages, to 12% per annum, effective April 1 2017, is expected to spur economic growth in the medium to long term.

The level of NPLs is, however, expected to return to the downward trend in response to a number of holistic NPL resolution policy measures by the central bank, including operationalisation of the credit reference system. The sustainable reduction in NPLs is expected to strengthen banks’ balance sheets and position them to meaningfully contribute to the revival of the economy.

Banker Jealous Chishamba said NPLs are growing and remain above the authority’s target of 5% as a result of underlying weak fundamentals affecting the Zimbabwean economy.

“For example, the current foreign currency shortages have negatively impacted companies’ ability to procure critical raw materials which has inevitably impacted their operating cycle and cash generating ability,” Chishamba said. He said banks’ repayment sources have been severely impacted by the economic woes.

“While the establishment of the Zimbabwe Asset Management Corporation has helped to absorb some of the bad loans post dollarisation, on the downside, this has also resulted in aggressive lending to bad credit as some banks fight to remain afloat,” he said. “Other banking institutions have taken a cautious approach in this tough operating environment to reduce their lending exposures. This is confirmed by the increase allocation of funding to liquid assets other than corporate loans. This, coupled with non-material improvement in the NPLs has also increased the ratio.

“Positively, from a macro risk management perspective, the establishment of the Credit Reference System may reduce information asymmetry in making the lending decisions. However, the impact of these measures is weakened by declining performance of the economy. Going forward, unless there is improvement in the status quo, NPLs are likely to increase reflecting the structural bottlenecks impacting the economy.”

Economist Vince Musewe said liquidity constraints are central to the current banking sector challenges.

“Clearly, we are in an unproductive phase where businesses are struggling to make ends meet mainly due to lack of disposable incomes and market illiquidity,” Musewe said. “The situation is bound to get worse as long as we don’t address the fundamentals of economic and political reforms. We are on a slippery slope indeed.”

Former economic planning minister Tapiwa Mashakada said the growing NPLs and shrinking loan books are reflective of the economic malaise.

“It’s all to do with the tight liquidity conditions on the market. Moreover, the collateral security issues regarding movable property are yet to be clarified so I think banks are doing prudential lending,” Mashakada said.
Zimbabwe, which adopted a multi-currency system in 2009 dominated by the United States dollar, is grappling with tight liquidity conditions which have culminated in a cash crisis due to low confidence among locals and a lack of foreign capital.

According to the RBZ, aggregate banking sector deposits increased by 0,61%, from US$6,51 billion as at December 31 2016 to US$6,55 billion as at March 31 2017. The banking sector deposits were dominated by demand and time deposits, which accounted for 56,96% and 27,87% of total deposits, respectively, as at March 31 2017.

The banking sector prudential liquidity ratio was high at 60,20% as at March 31 2017, against a regulatory minimum of 30%, as banking institutions adopted a cautious approach to lending during the period under review. As at March 31 2017, total banking sector loans and advances amounted to US$3,59 billion, translating to a loans-to-deposit ratio of 54,82%.

The RBZ said the improvement in the credit infrastructure through the establishment of the Credit Registry is expected to result in a further reduction in the levels of banking sector NPLs.

The decline in aggregate loans has seen banks income remain skewed towards non-funded income.