News Column

U.S.$700 Million Bad Loans Choke Zim Economy

August 29, 2014

Chris Muronzi



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 US$705 million -- a huge chunk of the country's bank total deposits and Gross Domestic Product, officials have told the Zimbabwe Independent.

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 US$700 million spread across all sectors of the economy and all banks, are an albatross around the neck of Zimbabwe's fragile economic. The official figure is US$705 million, but since June that figure has risen significantly," a senior official said.

"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 Zimbabwe Asset Management Corporation (Pvt) Ltd (Zamco), to acquire NPLs from banks in order to clean up and strengthen their balance sheets and provide them with the liquidity to provide credit."

Another official said while hunting for funding and investment from China might help to mitigate the liquidity crunch, economic structural problems need to be tackled head-on to secure sustainable recovery.

"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 US$9,9 billion debt overhang and resolving external payment arrears, as well as macro-economic issues to create a friendly investment climate on top of attempts to address the infrastructure deficit through deals with China.

Reserve Bank of Zimbabwe (RBZ) governor John Mangudya confirmed during his maiden monetary statement this week NPLs, a problem negatively impacting on the economy even though less spoken about, were a millstone on the economy.

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% (US$705 million) as at June 2014. Other officials say the situation is now much worse due to swelling interest on arrears.

"Globally, NPLs have been a hindrance to economic stability and growth of economies. The Reserve Bank is cognisant that the problem of high levels of NPLs, which exceed the international benchmark of up to 5%, can be a threat to financial stability and economic growth," Mangudya said.

"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."

Bankers Association of Zimbabwe (Baz) president Sam Malaba welcomed the setting up of Zamco to deal with the issue.

"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 US$700 million. The SPV will enable banks to create capacity for new lending, hence ameliorating the current liquidity challenges facing the economy for the benefit of the productive sectors."

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."


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: AllAfrica


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters