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Lending in a shifting terrain

Samuel Mapuranga:Economist

WHILE there continues to be high uncertainty about the containment of the Covid-19 pandemic, the virus has inflicted a huge blow to the global credit economy and an elevated risk for the rest of sub-Saharan African. The conventional sources of data typically used in credit-risk assessment became obsolete overnight.

Subsequently, there has been severe economic and credit costs reflecting the network complexities in the global economy.

Both supply and demand were equally suppressed suddenly by the unique features of the pandemic-triggered recession.

On the bright side, new approaches in lending emerged, revealing a way forward by which financial institutions can use in assessing the diverse impact of the coronavirus on different sectors and subsectors of the Zimbabwean economy.

Lessons drawn from the Great Financial Crisis (GFC) of 2007-09, are banks were able to design robust rapid credit policies, not only for underwriting and monitoring but also for assisting customers towards economic recovery.

As the Zimbabwean economy begins what will surely be a long road to recovery from a steep fall, financial institutions have a crucial role to play. Whilst credit conditions are largely favourable for many borrowers, pockets of risk are rising particularly for financial institutions.

Although the Reserve Bank of Zimbabwe responded promptly, in line with its mandate to preserve smooth market functioning and an effective transmission of monetary policy, much needs to be done now on supervision and regulation.

In order to repair the economic damages inflicted by the coronavirus pandemic, all players — government, policymakers and banks — must do more to support businesses to cope with the next phase, which is building recovery from this crisis.

Therefore, for banks, lending in a shifting terrain requires creative approaches in acquiring and utilising high frequency data in assessing models of firms and households.

Zimbabwe is currently facing its worst economic crisis in more than a decade, with skyrocketing inflation of 659, 4% year-on-year in September, and acute shortages of foreign currency, food, and medicine.

Regardless, authorities remain committed to fostering credibility in its currency, the Zimbabwean dollar, whose value has plummeted since it was reintroduced in 2019.

Global financing conditions
There are expectations that all economies across the world will register negative growth this year. The negative impact of Covid-19 on capital markets has been more significant in sub Saharan Africa (SSA), however equity and fixed income markets have taken a cautious optimistic view.

Corporate bond spreads have followed a similar trajectory, with the expected flight to safety evident in government bond yields pushing spreads wider. This has generally impacted the global credit market.

A normal dynamic will include occasional and temporary swerves in either a positive or negative direction otherwise this volatility will persist even if conditions continue to loosen.

In its latest 2020 growth forecasts, the IMF (International Monetary Fund) became more bearish due to fallout from Covid-19 on emerging markets. The global financier estimated that SSA will need approximately US$1,2 trillion through 2023 to repair the economic damage inflicted by the coronavirus pandemic.

These conditions will further affect the Zimbabwean economy as the nation continues to be in debt distress with a huge and unsustainable external debt of about US$10,545 billion (September 2019) of which about 60,35% is in areas.

Unlike the other 77 countries, Zimbabwe did not benefit from the G20 temporary suspension of debt payments to enable response to Covid-19.

Again, decline in economic activities in Zimbabwe’s major trading partners such as South Africa, has a knockdown effect on the economy.

Bank lending conditions in Zim
The spread of the coronavirus and the associated containment measures have led to a shutdown of economic activities during the first half of 2020 also impacting the banking sector.

Since lockdown started in March 2020, Zimbabwean banks have lent approximately ZW$18,35 billion to businesses and households. Now, as lockdown ease and economic activity picks up, banks need to help businesses by providing liquidity while taking cautious steps on associated risks.

Most companies’ capacity utilisation declined in 2019 prior to the pandemic.

Although Zimbabwean banks entered the crisis with higher levels of capital and liquidity compared to previous episodes, sharp tightening in financial conditions, heightened funding stress, and the major repricing in risky assets have tested their resilience.

These developments, together with the increasing potential for more adverse scenarios to materialise, triggered an unprecedented policy intervention.

Institutions at risk include those with hard currency, short-term funding on inter-bank liabilities, or those with high concentrations in sectors particularly affected by Covid-19 shock such as tourism, hospitality, and transport.

Such problems make a credit crunch likely, with sharp reductions in new lending and hoarding of liquidity and capital, thus, a new and unfamiliar environment for banks as they are required to evaluate and monitor credit risk with limited visibility and access to reliable data.

Looking at the shape of recovery is taking, banks can do much to help mitigate the impact of Covid-19 on the real economy.

Bank bridge financing and restructuring of loans for sound borrowers who have become cash-strapped can help businesses alleviate the impact of the crisis, adapt to the new operating environment, and eventually, contribute to the recovery stage.

Lines of credit and partial credit guarantees can provide additional financing to keep viable businesses in operation and restore credit flows to boost investment.

As the economy enters the recovery stage, exporters and firms integrated in supply chains need to benefit from tailored export financing, factoring and credit insurance mechanisms.

Credit risk mgmt new dynamics
The coronavirus pandemic has called for new specific measures on managing and mitigating credit risk. Several banks have been adjusting to the new dynamics and exploring new approaches to a myriad of challenges.

Some sectors such as travel, tourism and hospitality were severely affected, while other industries did better and struggled to meet demand. Thus, changes in creditworthiness differ by sector and subsector to a larger extent than before the crisis.

Telecommunications and pharmaceuticals for instance saw little to no impact while industries such as food distributors did better.

Still, pockets of risk are growing.

Though officials reported aggregate banking soundness, indicators do not raise major red flags, they mask vulnerabilities specific to a dollarised system hence the need for dual lending.

Likewise, a significant variation in prudential indicators across individual banks is key. This might cause further deterioration of assets quality thus having an increase in non-performing loans trending towards the watchlist category.

As the local currency appreciates, there is a danger that borrowers will struggle to repay loans leading to banks sitting on huge non-performing loans (NPLs).

NPLs hinder economic growth and impair economic efficiency. The RBZ needs to decide how it assesses credit risk.

Banks on the other hand should adopt a value driven credit culture given that most firms in Zimbabwe have been operating with inadequate working capital whilst in need of capital expenditure. Firms also need to worry about recapitalisation first before going ahead to borrow working capital.

When there is a major economic change, there is a need to properly strategise to ensure that the general environment is conscientised and is prepared for the changes.

Banks need to properly analyse clients’ requirements and trading activities while avoiding excessive reliance on historical information which might suffer from creative accounting.

This will result in lending to borrowers with no capacity to service and repay back their loans. Some of the methods banks can use in managing risks include:
The need to analyse demand shocks and recovery trajectories and translate to probability-to-default multipliers.

Going deeper into borrower financials and business models to estimate resilience to Covid-19 crisis effects.

Mining transaction data to derive cashflow, affordability, mining alternative high frequency data to derive revenue trends and auto-feed results into decision engines.

Equally important, there is a need for banks in Zimbabwe to shift to a customer assistance interaction model and make it a priority in a digital transformation.

Since assets quality challenges can potentially heighten liquidity risk given the challenging operating environment where credit is largely financed by volatile short-term deposits, banks need to enhance credit risk management systems with special emphasis on credit assessment, origination, administration, monitoring, evaluation and control standards.

Given such a scenario, banks must develop sector-specific solutions, augment capacity and evaluate cost-benefit of organic versus inorganic options. To improve turn-around time, simplified templates and pre-approved limits will help in shifting the pipeline.

Conclusion
As the Zimbabwean economy recovers, banks should seize this moment to move away from the pre-crisis growth models and accelerate transition.

The financial sector measures to support the economy should be broad, transparent, and rapid while balancing stability concerns. In addition to that, emergency measures should be time-bound and have clear exit strategies.

Pandemic response policies have prevented an adverse equilibrium of acute financial market volatility thus, impairing access to funding for firms in need of recapitalisation. This has resulted in a substantial contraction in lending and a steeper collapse in real economic activity.

Delivering more with less, banks should closely monitor liquidity and credit trends given an opportunity for dual lending to deserving firms. This means reprioritising lending to productive sectors while enhancing efficiency.

Mapuranga writes in his own personal capacity. The views expressed in this article are those of the author and do not necessarily represent any organisation. E-mail:
smapuranga15@gmail.com; or Twitter: @Sa_miiM. This article appears in the 2020 Banks & Banking Survey magazine, whose theme is “Reimagining Banking: Beyond Survival”.

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