Non performing loans analysis - Mr. Francis Macheka: Page 2 of 4

in turn increases the banks’ lending rates and thus contributes to lower credit growth.

 

  1. Availability of resources

 

Non-performing loans may signal that banks use fewer resources than usual in their credit evaluation and loans monitoring process. In our situation, the current economic blueprint, hinges on the availability of resources hence any obstacle to financing should be dealt with.

 

  1. Lowers banks’ capital

 

It should be noted that NPLs lowers the banking sector capital as a result of provisioning. This also contributes to lower credit supply, and therefore may have implications for economic activity.

 

  1. Negatively affects banks’ intermediary function

 

Another channel in which NPLs drag the economy is through disintermediation of the banking sector. One of the mechanisms by which the problem of non-performing loans drag on the economy is that banks’ intermediary function declines as non-performing loans erode banks’ profitability.

 

Banks play an important role of allocating and distributing people’s savings for use in most productive investment. Their intermediary function is essential for economic activity as it enhances the productivity and efficiency of the economy as a whole. If banks’ amount of disposal of non-performing loans continues to exceed their profits, it will reduce banks’ net worth and lower their risk-taking capacity, making it difficult to invest funds in risky projects and to realise potentially productive businesses. In this way, the problem of non-performing loans lowers banks’ intermediary function.

 

  1. Increase in costs to the banks

 

Another challenge is when the banks hold non-performing loans for a long time without disposing them. In this case banks incur costs other than the amount of disposal of non-performing loans. That is to say, by continuing to hold non-performing loans, or assets that do not generate returns, banks would lose returns that they would have earned if they had collected the loans (this is called “opportunity cost”).

 

Hence