THE banking sector is grappling with the impact of the 200% interest rate hike by the Reserve Bank of Zimbabwe as it seeks measures to avoid a surge of non-performing loans (NPLs) that previously crippled the operations of financial institutions as borrowers are likely to default.
The central bank hiked interest rates to 200% last year to discourage speculative borrowing, which it said has contributed to currency volatility as the Zimbabwe dollar weakened significantly stoking inflationary pressures and eroding incomes.
Financial institutions, which include First Capital Bank, have, however, warned that the increase of interest rates could result in a significant increase in non-performing loans as borrowers struggle to repay at such rates, which are the highest globally.
A non-performing loan (NPL) is a sum of borrowed money, whose scheduled payments have not been made by the debtor for a period of time – usually 90 or 180 days.
In an interview, Bankers Association of Zimbabwe president and CABS managing director Mehluli Mpofu said the financial sector was concerned over the possible flood of NPLs as a result of the interest rate hike by the RBZ.
“As BAZ, we share the concern that current interest rates can lead to non-performing loans. At 200%, the implied monthly interest rate of about 17% is substantially higher than the latest month-on-month inflation rate of about 2%,” he said.
“The interest cost is difficult to pass onto the consumer hence borrowers have to absorb this cost at a time when the demand has significantly slowed down thus creating fertile ground for non- performing loans.”
Mpofu revealed that banks are looking to continue to enhance and adopt sound credit risk management systems and internal controls to minimise potential non-performing loans against the background of a challenging operating environment.
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“Effort is being put into engaging borrowers to explore options which include; reducing Zimbabwean dollar-denominated loans, shifting to other lending products such as overdrafts, where the interest cost can be minimised as well as borrowing in United States dollars where cash flows permit,” he said.
Mpofu called on RBZ governor John Mangudya to reduce interest rates as dictated by inflation and the amount of liquidity in the market when he soon presents the Monetary Policy Statement.
Local banks were saddled with NPLs amounting to more than US$700 million in 2014. NPLs had peaked to 20%, which was well above the global benchmark of 5%. This prompted the central bank to establish the Zimbabwe Asset Management Company (Zamco) in July that year to resolve the problem of NPLs of banking institutions through acquiring, restructuring and disposal of NPLs, which were constraining banking institutions’ credit mediation capacity and impeding economic growth.
Zamco assumed ZW$1,2 billion in NPLs from struggling financial institutions.
“The role of the Zimbabwe Asset Management Company in improving the banks’ asset quality has been phenomenal,” Mangudya said in the 2021 Mid Term Monetary Policy Statement.
“The acquisition of non-performing loans by Zamco helped improve and enhance the capital adequacy and earnings of banks through removal of toxic assets and replacing them with risk free assets (treasury bonds) thus providing earning assets that could be used to unlock liquidity as security.”
Zamco will wind down their operations by 2025.