BALLOONING non-performing loans (NPLs) in the banking sector have become an albatross around the fragile economy's neck as they threaten financial stability and growth amid indications they are surging well above the official
In a briefing this week, fiscal and monetary authorities said the precarious situation is compounded by the already serious liquidity crunch and decelerating economic growth in a country buffeted by high political risk, high cost of borrowing, low business confidence and negative perceptions around the controversial indigenisation policy.
"The truth is NPLs, which are now well over
"They are a serious drag on the economy as they create disintermediation of the bank system of lending due to bad loan books and erosion of profitability. That is why cabinet has had to intervene through the creation of a National Special Purpose Vehicle (SPV), the
Another official said while hunting for funding and investment from
"We have fundamental and serious structural problems and NPLs are manifestation of that. By dealing with NPLs crisis cabinet is in the right direction. But it must also realise our external position is vulnerable, we have a wide current account deficit, an overvalued exchange rate and low international reserves," the official said.
"This year growth will decelerate and risks to the outlook such as company closures, lower-than-expected revenues collections, policy slippages and financial sector stress won't go away because of these Chinese deals. The economic environment will remain difficult, posing significant risks to the budget and to financial stability. We need policy interventions to restore fiscal and external sustainability and reduce financial vulnerabilities. That's what cabinet must also deal with."
Officials say government must also wrestle with the
He said bad debts were lowering banks' intermediary function due to erosion of bank profits; wearing down banks' assets and wearing away their capital; causing stagnation of economic resources, such as labour and capital, in areas with low productivity; and reducing bank lending.
Mangudya said NPLs have been rising from 1,6% in 2009 to 18,5% (
"Globally, NPLs have been a hindrance to economic stability and growth of economies.
"As such, addressing the problem of NPLs is essential in order to invigorate the Zimbabwean economy. The resolution on nonperforming loans is therefore a necessary condition to improve the economic status of the country and to address the vicious cycle of low economic growth, company closures and banks vulnerability.
"Apart from being a source of concern for financial stability, there is strong evidence that NPLs have led to a decrease in credit growth which is undermining current economic recovery efforts. Unfortunately, the NPLs are now continuously growing even without new lending by banks because of interest accruing on the unpaid loan balances. To make matters worse, NPLs are traditionally charged penalty rates of interest which means that they are now growing at a much faster pace."
"The setting of a SPV for banking sector NPLs (Zamco) is very important for the banking and financial sector. Baz welcomes this development which has potential to enhance financial intermediation and credit availability in the economy," he said.
"Banks are currently weighed down and saddled by NPLs in excess of
Mangudya said the rising NPLs could be attributed to the operating environment that has characterised the post multi-currency period when businesses and individuals rushed to obtain bank credit to expand their businesses which had been starved of cash during the hyperinflationary era.
"Unfortunately, this was done by utilising short-term funding to purchase long-term assets (thereby creating funding mismatches) on the expectation that this phase was going to continue or that it was sustainable," he said. "The other fundamental causes of rising NPLs include institution-specific factors such as weak corporate governance practices and risk management systems.
"High cost structures, obsolete equipment and intense competition from relatively cheap imports have compounded the problem resulting in borrowers failing to service their loans in terms of contractual agreements. The situation in which banks are saddled with high NPLs that do not decrease and remain at high levels for a long period would result in the prolonged stagnation of the economy."
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