Zimbabwe banking sector has been experiencing a perennial problem of high non-performing loans since the dollarisation of the economy in 2009.
The average non-performing loans (“NPLs”) ratio stood at 16% as at 31 December 2004 down from 20% at 30 September 2014. In a market with loans and advances of $4 billion, this translates to NPLs amounting to an average of $640 million.
The decline in the NPL ratio noted over the last quarter of 2014 is largely attributable to the closure of Interfin and Allied banks and general improvement in loan quality in a “few banks.”
Comparing Zimbabwe to countries like Kenya, Zambia, Nigeria and South Africa shows that the level of NPLs in Zimbabwe is still far too high. World Bank numbers put the last three years average NPLs in Kenya at 4,7%, Zambia (8,5%), Nigeria (4%) and South Africa (3,7%).
The BRICS (Brazil, Russia, India, China and South Africa) all have NPLs in the sub-ten percent. The 2014 NPL readings for these BRICS countries as listed on the World Bank website are 2,9%, 6,5%, 4%, 1,1% and 3,4% respectively.
Given the high NPLs, it is imperative that there is need to focus on unwinding these bad loans if Zimbabwe is to deal with what the RBZ Governor states in his January 2015 Monetary Policy Statement as the “scourge of NPLs.”
Econometric research shows that the level of NPLs is driven by various factors both at macroeconomic and institutional idiosyncratic levels. These factors include changes in the economic activity, exchange rates, stock prices, interest rates as well as weak institutional lending and risk management policies.
In the Zimbabwean market, the high NPLs can be attributable to specific institution weak risk and lending management systems, borrowers funding mismatch, that is, borrowing short for long term assets, and weaker economic fundamentals.
NPLs do affect the profitability and erode banks’ capital and thereby limit banks’ lending capacity. NPLs do have an adverse multiplier effect to the whole economy.
In response to the endemic high NPLs, the RBZ established the Zimbabwe Asset Management Corporation (Zamco), an independent asset management company, modelled along similar asset management companies formed in other countries such as in South Korea (Korea Asset Management Corporation), Nigeria (Asset Management Corporation of Nigeria), Indonesia (Indonesian Bank Restructuring Agency) and Malaysia (Danaharta).
The operation of Zamco, in simple terms, will be to acquire “bad loan books” from Zimbabwean banks leaving the banks with “good loan books” and unencumbered capital. This is with a view to support credit extension growth. To date, Zamco has acquired NPLs amounting to $65 million. Zamco is funded through securitisation of its loan book in the debt capital markets and issuing bonds.
According to the RBZ, the acquisition process will follow a set eligibility criteria and will focus on fully secured and non-insider loans. Banks will be advised by March 2015 how much of their NPLs meet Zamco’s eligibility criteria. It is important that the acquisition process be robust to prevent the perception that the process is “pardoning past bad lending decisions.” The process will be a failure if it encourages moral hazard (excessive risk taking behaviour) in the banking sector in the form of reckless lending.
The successful implementation of the “bad loans” purchase programme will theoretically release up to $700 million to the banks for their lending activities.
This is effectively a release of liquidity into the market. The market, however, needs to watch the level of NPLs on new loans that are being written now by banks as this will indicate whether the current level of NPLs going forward will unwind.
The cost of “cleaning” the banks’ balance sheets will probably require bond and treasury funding of up to $700 million based on the current NPL rate of 16%.
Given that Zamco issued bond will effectively be government guaranteed, this makes Zamco debt sovereign debt. This raises the question on the capability of Zamco to tap on to the international debt market. The net cost to the government will in turn depend on Zamco’s loan recovery rate.
An IMF report on Korea Asset Management Corporation shows that recovery rates on banking crises across selected countries ranged from as low as 8% and mostly average around 35%. The other not so clear cost of the initiative is the opportunity cost of the government resources that will be focused on Zamco’s effort of managing the acquired distressed portfolios.
To give a balanced view, the total costs should be compared to “greater good” of stabilising the banking sector and the economic stimulus of the NPL acquisition programme.
Zamco’s task will not be an easy one. The key issues that the company will need to deal with include funding its operations through issuing bonds, managing collections given the general low recovery ratios attained by similar companies.
The collections capability of the company remains unknown and untested, and company’s first financial results will give the market an early indication on the company’s capabilities in managing the acquired NPLs. The Nigerian’s Asset Management Company of Nigeria (Amcon) not only acquired bad loan books but also injected fresh capital into troubled banks.
The latter does not seem to be part of Zamco’s mandate given the liquidity constraints facing the economy. Zamco’s operations will need to be for a specific time period as non-time bound operations will tend to induce moral hazard by banks in their lending activities.
Nesbert Ruwo (CFA) is an investment professional based in South Africa. He can be contacted on firstname.lastname@example.org