NPL ANALYSIS – CAUSES AND STRATEGIES

Introduction

Zimbabwean banks have adopted a cautious approach to lending following a sharp rise in non-performing loans. A number of financial institutions have obtained writs of execution to attach property to recover money from defaulting clients.

Acknowledging the gravity of the problem, the Reserve Bank of Zimbabwe Governor Dr John Mangudya has accorded the resolution of the NPLs problem top priority as enunciated in the recently announced Monetary Policy Statement.

Main causes of NPLs

1. Diversification of funds/poor management of funds

2. Weak loan portfolio management by bank staff especially weak credit analysis from the beginning.

3. Integrity of borrowers/lack of transparency by borrower.

4. Change of country policies – country laws that do not favour lending business.

5. Court injunction instituted when bank intends to dispose properties/low prices fetched when disposing mortgaged assets.

6. Business failure/inexperienced or lack of entrepreneurial knowledge on borrowers side.

7. Natural calamities/change in economic conditions like inflation, draught etc.

8. Death of key person. This usually applies to family owned business or where there is a single business owner.

9. Unfaithfulness of bank staff (corruption)

10. Lack of reliable market information

Impact of NPLs to Financial Institutions and the economy at large

There are many reasons why as country and the policy makers should be worried about NPLs given this is not only a monetary phenomenon but it also impact heavily on the real sector.

1. Weakening borrowers’ capacity to service debt

The impact of the real economy on NPLs is mainly explained by weakening the borrowers’ capacity to repay their debt, while the feedback from NPLs to the real economy is often identified through the credit supply channel.

2. Increase uncertainty regarding bank’s capital position

NPLs increase the uncertainty regarding the capital position of the banks and therefore limit their access to financing. This in turn increases the banks’ lending rates and thus contributes to lower credit growth.

3. 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.

4. 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.

5. 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.

6. 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 the opportunity cost of holding non-performing loans by the banks is the returns that bank could get if that money had been put to productive use. This cost affects both the bank and the economy at large.

Strategies to remedy NPLs

In his Monetary Policy statement in July, Dr Mangudya said the banking sector’s aggregate ratio of NPLs to total loans improved from a peak of 20,45 percent in June 2014 to 14,52 percent as at 30 June 2015. This rate has retreated to 13 per cent as at 31 August 2015 with a target to move towards a single digit of 5 per cent by June 2016. Financial institutions are saddled with about $577 million worth of NPLs and the RBZ has been working with the sector to clean the institutions’ balance sheets.

Against a background of high levels of NPLs, and their economy-wide implications stated above, the Reserve Bank has instituted holistic measures to resolve non-performing loans in the banking sector. In addition, banking institutions have instituted various measures to resolve the NPLs including the following:-

1. Restructuring of debts through engagements with defaulters.

2. Formation of dedicated loan recovery units by financial units. This is to ensure that dedicated resources are focused on dealing with NPLs.

3. Formation of the Zimbabwe Asset Management Corporation (ZAMCO) which has been tasked to deal with NPLs for distressed companies. Banks have since surrendered over $188 million worth of NPLs for takeover by the Zimbabwe Asset Management Company. The bulk of this amount is from distressed strategic companies in agriculture sector and manufacturing. This process is still ongoing and is a major factor that has caused the NPL ratio to be on a downward trend.

4. Handing over defaulters to lawyers for litigation purposes. Although this is not the best since the legal process tends to be long, it is necessary when dealing with errant defaulters. Some defaulters whilst have the capacity to pay, they just lack the will to do so.

5. In case of Agribank as an institution, we have the AFC Act at our disposal that empowers us to dispose of defaulters’ pledged assets without going through the courts. The Act empowers the Bank to auction defaulters’ assets after going through due process.

6. Creation of a credit reference bureau. The RBZ is in the process of creating a credit reference bureau that will ensure that those wishing to avail credit facilities are vetted before approval. This was after it was realized that most defaulters are multi-banked thereby worsening both their situations and those of lenders.

Conclusions

With all these challenges of NPLs, corporates and individuals should learn to understand that lending is a major line of business for banking firms as they provide credit for a wide array of business purposes.

The process of lending represents a key source of funds for the business sector while being an important line of business for the banking industry. The process of credit should not be disturbed through defaulting by borrowers. It is important that borrowers should understand that lenders only make loans when they think they’ll be repaid.