• Fri. Apr 19th, 2024

Fresh Non-Performing Loans risk looms


Nov 20, 2023

By ETimes

Zimnat Asset Management through its weekly economic report warned that a fresh round of dollarization driven by the extension for use of US Dollars might result in the growth of non-performing loans.

President Emmerson Mnangagwa announced the extension of the multi-currency regime until 2030, surpassing the initially planned cut-off in 2025.

“Such a development is meant to boost investor confidence and bring certainty to planning for businesses, given some financial institutions had started scaling down US dollar lending over concerns regarding the fate of foreign currencies after 2025,” the report read.

According to the report, choosing to prolong the multi-currency regime, Zimbabwe seeks to avoid the uncertainties associated with its currency, especially considering the significant depreciation of the Zimbabwean dollar by around 90 percent since the beginning of the year.

This extension reduces complexities and risks associated with currency conversion, enhancing the efficiency of cross-border business operations.

“Despite the economic benefits, Zimbabwe faces the looming challenge of non-performing loans within its banking sector. The historical trend reveals a recurrent issue of non-performing loans during periods of economic dollarization, exemplified in the year 2014.

“The non-performing loans (NPLs) ratio had surged to 20,45 percent, surpassing the internationally acceptable threshold of 5 percent. During that time, the Reserve Bank of Zimbabwe responded by establishing the Zimbabwe Asset Management Company to clean-up the nonperforming loans,” Zimnat added.

With 70 percent of transactions in USD and lending rates between 12 percent to 15 percent per annum, the risk of defaults is elevated.

According to the RBZ July 2023 report, “The banking sector’s asset quality as measured by non-performing loans ratio (NPL) of to 3,30 percent as at March 31, 2023 remains satisfactory deteriorated. However as at December 31, 2022 the NPL ratio was 1,58 percent. The NPL ratios are within the acceptable international threshold of 5 percent.”

Our NPLs truly have a relationship with increased USD usage and high interest rates.

“In terms of sectoral distribution of non-performing loans, as at March 31, 2023, the agricultural sector (67,68 percent) had the largest value of non-performing loans followed by individuals (9,32 percent),” the report ended.

Reporting banks have issued that they have seen a rise in USD denominated loans and with the agriculture sector borrowing foreign currency and suffering exchange losses when selling their produce, it is not a surprise to see them leading in this category.

Economist Dr Evelyn Chifamba said high NPLs might instigate banking industry instability and episodes of bank failures.

“NPLs deter economic performance in several ways. To begin with, banks might strategically reduce lending to avoid further losses, which reduces the supply of loans to economic agents. A reduction in loans issued in the market slows economic activities, further negatively impacting the economic growth of a nation,” Dr Chifamba said.

She added that the complexity and connectivity of financial markets to the rest of the economy make them vital to understand the consequences of NPLs accumulation, especially in developing.

This scenario echoes the past, where the economy experienced challenges with non-performing loans. Prudent lending practices are crucial to prevent defaults and maintain a stable economic environment.

However, Zimnat added that, “President Mnangagwa’s extension of Zimbabwe’s multi-currency regime until 2030 signals commitment to economic stability and investor confidence amid local currency uncertainties. The move, reinforcing the U.S. dollar’s prominence, provides businesses an extended investment timeframe, potentially fostering growth and simplifying international transactions in line with NDS1 goals.”

The asset manager concluded that the historical challenge of nonperforming loans during economic dollarization poses a lingering threat, requiring vigilant lending rate management to sustain stability amidst 70 percent of transactions denominated in USD –Harare

By ETimes

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