ZAMCO buys US$80m bad loans

ZAMCO buys US$80m bad loans

THE Zimbabwe Asset Management Corporation (ZAMCO) has taken over US$80 million worth of bad loans, as the central bank moves to deal with the problem of   growing non-performing loans (NPLs) in the financial sector, the Financial Gazette has established.Mangudya DRDEPThe growing NPLs portfolio within the banking sector has been a result of poor credit analysis and lending, often to cronies and bank owners. This has emerged as the biggest threat to banking sector stability.
Reserve Bank of Zimbabwe (RBZ) governor, John Mangudya, said last week: “So far the company (ZAMCO) has purchased toxic assets (NPLs) worth about US$80 million.”
Banks have more than US$700 million worth of NPLs.

The situation is against the backdrop of weak macro-economic fundamentals, including low exports, weak industrial capacity, high cost of finance, weak current account and trade deficit.
The central bank said ZAMCO would not assume all bad loans within the banking sector but would only take over bad loans secured with collateral as this was naturally prudent.
The acquisition of NPLs from financial institutions would strengthen banks’ balance sheets, enabling them to access fresh capital to fund productive sectors and help spur economic growth.
Assumption of bad loans by ZAMCO would be supported by establishment of a national credit reference bureau to address the problem of information asymmetry in credit extension.
The expectation is that taking away NPLs from the books of banks would allow the financial institutions to increase credit to private sector.

This will entail raising the requisite capital to be used to cleanse NPLs on a commercial basis, against a bank’s financial assets, through a debt instrument of 10-15 years.
In the face of the challenging economic conditions, the debt repayment capacity of borrowers has remained constrained.
Several banking institutions have collapsed recently due to poorly performing loan books, although the bulk of the institutions have been accused of shareholder and management delinquency, with insider loans playing a key role in their insolvencies.

Curators have often found it difficult to recover lent funds due to the fact that most loans were extended without or with meaningless collateral.
These are normally loans extended to directors, management or their cronies and issued without collateral.

Banking sector executives said in the current liquidity-troubled environment, recovering poorly performing loans was proving very difficult, resulting in an escalation of forced sales to recover bad debts in cases where collateral was in place.
Most banks have proceeded to classify NPLs as bad debts, implying that the debts may have become irrecoverable and possibly due for write off.
Another possible cause for increasing NPLs has been multiple borrowing at different banks by individuals and companies.
To mitigate this risk, the central bank is currently working on establishing a central credit registry system.

The system will comprise private credit reference bureaus (CRB) and a registry within the RBZ which will serve as a databank for licenced CRBs.
The credit reference system will complement the work of ZAMCO to minimise bad debts in the banking sector.
The bureau would enhance the verification process of borrowers, enabling bankers to assess credit risk and reduce the level of NPLs in the banking sector.
The system would also allow lenders to determine how much and at what rates to lend. It would induce transparency in the economy as there would be greater sharing of information, making financial institutions aware of their customers’ financial exposures.

Credit bureaus are set up to collect individuals, corporate and other legal entities’ credit data from a variety of sources; consolidate the information into profiles and make it available on request to subscribers.
This helps enhance financial stability by promoting more robust risk management practices, reducing credit risk, increasing the supply of credit to fuel growth-related activities and helping to promote lower interest rates.
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