Levels of non-performing loans surge

Published: 18 October 2013

Nyanga - THE level of non-performing loans in the banking sector has risen from average of 0,3 percent in March 2009 to an unhealthy average rate of 13,8 percent by March this year, the Zimbabwe Economic and Policy Research Unit has said. Zeparu senior research fellow Dr Sehliselo Mpofu told delegates to the Institute of Bankers of Zimbabwe 44th Summer Banking School in Nyanga yesterday that the rate of non-performing loans had exceeded the recommended average of 5,8 percent.

An autonomous think tank which advises Government, Zeparu was established by a deed of trust in 2003 following the signing of a grant agreement between the Government and the African Capacity Building Foundation in 2001.

Dr Mpofu made the remarks while presenting a paper on "Positioning the Financial Sector as the Nerve Centre for Fast Tracking Economic Growth" in which she took an incisive look into challenges facing financial institutions and the economy.

Because of the challenges facing the country's financial services sector its ability to support economic activity is constrained. The sector accounted for 4,2 percent of gross domestic product in 1980, which rose to 8,2 percent in 1990, 6,6 percent in 2000 and further slowed down to only 4,1 percent after dollarisation in 2009.

"The level of non-performing loans has been growing. As of March 2013 the rate was 13,8 percent against the recommended 5,8 percent, which is an unhealthy situation," she said.

Dr Mpofu attributed the exponential growth in non-performing loans to insider lending among directors, inadequate due diligence on loan application, moral hazard, information asymmetry, high interest on short-term loans and multiple borrowing.

She also cited low project productivity and profitability, poor project monitoring by banks, violation of prudential guidelines, diversion and misuse of borrowed funds, droughts and hazards resulting in poor yields and a harsh operating environment.

"The problem is that demand for cash is outstripping supply, people want different kinds of finance and some banks overlend yet most people are overborrowed, but still want to borrow more yet they are failing to service the loans they (already) have.

"Given that situation, banks are not getting enough external lines of credit and imports are more than exports while remittances are low and the funding base is shrinking. People are borrowing because they want to finance infrastructure and production.

"But (because of the level of non-performing loans) there is potential for a crisis. There is need to exercise caution when you get to these levels," Dr Mpofu warned banks. According to the research by Zeparu as at August 2013, about 86,4 percent of disbursements were loans and advances, 8,5 percent mortgages, 3,5 percent bills discounted, 1,5 percent bankers' acceptances and 2 percent was other investments.

From the research conducted by Zeparu challenges faced by financial institutions include highly priced foreign financing (high risk premium), limited external lines of credit, undercapitalised small banks, challenges in attracting shareholders with adequate funds and bank clientele with a high propensity to borrow.

In addition, Zeparu noted that some banks are overlending against transient deposits, relatively inactive inter-bank market (bilateral trades), absence of a Credit Rating Bureau, weak individual and corporate balance sheets, effects of the global financial crisis on liquidity and collateral security challenges facing bank clients.

Dr Mpofu said Zimbabwe's financial and capital markets covering all financial institutions, the central bank, stock market, asset managers, bonds and treasury bills faced a myriad of challenges to make meaningful contribution to economic recovery.

Zeparu proposed segmentation of minimum capital adequacy requirements for the different types of banks, exercising restraint on excess bank lending, enhancing due diligence on bank lending, deposit mobilisation to support increasing credit demand, channel more funding to productive sectors to resolve the challenges.

The economic and policy research unit also proposed incentives for rural bias and support for SMEs, promotion of non-cash transactions, banks to support women who have no collateral security for borrowing as part of solutions to the problems.

- Herald