Bad debts soar to US$500m

via Bad debts soar to US$500m Sunday, 03 November 2013 by Darlington Musarurwa SundayMail

The rising rate of bad debts, which accelerated to US$500 million in the first six months of the year, is stoking fears that banks will naturally be reluctant to extend credit to the private sector, negatively affecting an already slowing economy in the process, market watchers believe.

At 13,8 percent of total loans and advances, non-performing loans (NPLs) in the local banking sector — consisting of 13 commercial banks, three building societies and one savings bank — are considered “among the highest in sub-Saharan Africa”, according to the recent First Half Banking Sector Survey by stockbrokers MMC Capital Research.

World Bank statistics show that the rate of non-performing loans to total gross loans, defined as the value of non-performing loans divided by the total value of the loan portfolio, was measured at 4,6 percent in South Africa and 2,5 percent in Lesotho in 2012.
For Swaziland, the rate was gauged at 7,5 percent in 2011.

Soaring non-performing loans, especially in an environment where most performance indicators such as profits and deposits are declining, are raising the spectre of reduced credit growth as banks became increasingly cautious about borrowing.

“The deteriorating economic fundamentals have been the chief contributor to the sector’s worsening NPL ratio as most borrowers are now failing to service their debts due to deteriorating macro-economic environment,” said MMC Capital Research, adding: “We are of the view that banks will be more cautious in their approach to lending thus reducing credit growth in the economy going forward.

“This situation will have a huge bearing on the economy as the reduced credit supply will lead to working capital challenges and in many instances businesses will fail to fund capital expenditure. The net result will be a decline of private gross fixed capital formation and private consumption which in turn will negatively impact economic growth.”

Slowing local economic growth, plagued by an increasingly illiquid market, is levying a heavy tax on the banking sector.
The Ministry of Finance has since reviewed its economic growth forecast to 3,4 percent for this year, down from the earlier projected 5 percent.
A deteriorating economy and the Memorandum of Understanding (MoU) signed between Government and the Bankers’ Association of Zimbabwe (BAZ) meant to rein in rising interest rates have directly impacted on the sector.

As a result, total bank deposits dropped 1,3 percent to US$3,84 billion in the first half of the year from a year earlier.
Worryingly, long-term deposits that can ideally be used for long-term funding were at 14 percent, with the bulk being short-term or transitory deposits.

Despite shrinking deposits, banks aggressively extended loans, with the loans-to-deposit ratio, which measures the portion of deposits that are loaned out, climbing to 96 percent from 88 percent recorded in the same period a year ago.
Loans and advances to the private sector jumped by 18,4 percent to $3,67 billion, with CBZ, which has a 25 percent deposits marketshare, advancing more than 28 percent to the market.

Profitability in the banking sector – measuring the cumulative net income – unsurprisingly slumped by 17,7 percent to US$52,1 million in the period under review.

However, analysts are concerned that much of the loans by banks are targeted at individuals, who received 19 percent of the allocations, at the expense of productive sectors of the economy such as agriculture, manufacturing and mining at 18 percent, 17 percent and 7 percent respectively.
Although the mining sector requires huge financial outlays, the long-term nature of its projects has made it difficult for players to access cheap credit.

As aggressive as they have been in extending loans, banks, which are also facing pressure from the Reserve Bank of Zimbabwe (RBZ) to up their minimum capital thresholds, are vigorously pursuing their money in those companies that are failing to repay.

CAPS Pharmaceuticals, which used to be the country’s largest manufacturing company, had its assets valued at US$6 million that include the drug manufacturing plant, a three-storey administration block with 47 offices, a kitchen, bar with a dispensary section, packaging sections, cold-rooms, receiving bays, a clinic and a guardroom, auctioned off for US$1,6 million earlier this year for a US$6 million debt owed to CBZ.

Popular bread manufacturer Lobel’s was lucky to survive liquidation after five banks – FBC Bank, CBZ Bank, NMB Bank, Metbank and Capital Bank – owed a cumulative US$14 million, opted to take over the administration of the company last year.
Similarly, listed mining concern Rio Zim has managed to re-invent itself after tottering on the brink of liquidation last year, choked by a US$90 million debt, with US$60 million owed to banks.

The survival of companies that are heavily indebted to local banks hangs in the balance as the local economy continues to decline.
Added MMC Capital: “The economic shrinkage that started early in the year has not subsided as aggregate demand continues to fade and economic output continues to weaken.

“The economy continues to be haunted by limited liquidity which has curtailed the utilisation of excess capacity in industry.
“A number of companies have scaled down operations with others even closing down as the shortage of capital continues to impact negatively the local manufacturing space.”

There is, however, hope that the new Government, buoyed by the overwhelming mandate it received in the July 31 election, will be able to chart a new growth trajectory for the economy.

Recently, a new blueprint, the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (Zim Asset), was launched in order to guide developmental projects through to December 2018.
Already, Government is working on quick-win projects with the recent gazetting of Statutory Instrument 147A of 2013 on October 16 giving effect to mandatory blending of ethanol of up to 10 percent (E10) showing Government’s bold intent.

Plans are also under way to operationalise Ziscosteel under the New Zim Steel brand, a project that will naturally have a big impact on the economy.