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Scaling down NPLs requires sustained strategy

EFFORTS to scale address the problem of rising nonperforming loans (NPLs) in banks requires sustained strategy, as the longer it is takes, the greater the risk of sputtering recovery in the banking sector.

Scanning 1st quarter 2019 banks published financial statements reports it is clear that levels of NPLs have not improved much. A number of banks in Tanzania are currently experiencing high levels of non-performing loans.

Hence, there is broad consensus that high NPL levels ultimately have a negative impact on banks lending to the economy.

The measured and sustainable reduction of NPLs in banks’ balance sheets is favourable to the economy from both a micro-prudential and a macro-prudential viewpoint.

At the same time, it is acknowledged that economic recovery is also an important enabler of NPL firmness. Addressing asset quality issues is one of the key concerns for Central Bank of Tanzania banking supervision, in an exercise that has started to bear fruits.

The media has provided an overview on the improvement within banks. This progress signals a positive progress for a sub-sector that has been stumbling in high levels of non-performing assets.

Going back to audited published financials statements, levels of NPLs are linked to reduced profit levels in 2016 and 2017.

I am not intending to single out specific bank’s challenges, but to try to reexamine continued challenges faced by banks today as far as debt recovery exercise is concern.

A failure to prompt recover from defaulters undoubtedly impacts bank’s investment plans to extend credit to existing businesses to enhance their expansions and even to finance new ventures.

Amidst repeatedly NPLs story cutting across banks, I am much more alarmed about the future of the banks than the banks of the future in Tanzania.

While it is acknowledged that addressing non-performing loans will take some time and will require a medium-term focus, robust recovery strategies from defaulters, certainly, credit administration and the asset quality of banks is the most significant factor that affects the future of the banks.

It is always taken for granted, but through examination on how long it take to recover from defaulters, most of you, would agree with me that in an economy such as Tanzania, the asset quality of the banking system has significant repercussions for the stability of the inclusive financial system of a country.

The all-purpose sensitivity about a bank’s financial health is significantly determined by the level of nonperforming advances held in bank’s books.

It is, thus, not amazing that the existing levels in non- performing assets in banks keep on attracting a lot of attention amongst policy makers and well as politicians.

The business of banking fundamentally involves intermediation taking funds from one source and channelling those funds into lending activities and credit risk whether, we like or not, are a direct outcome of this intermediation process.

Assertively, amount of default and impairment of assets are expected to show up in the normal course of banking business and therefore, credit risk supervision assumes a perilous role in ensuring that such impairment is contained to a minimum.

Most of you would agree with me that when banking was simple, and project promoters were reliable, credit risk administration was also a direct process.

The then, lending verdicts were made on generalized basis as the banks knew their borrowers and their businesses somewhat closely and therefore bankers then did not escalate a need to collect and process elaborate information for backup their credit decision making structure.

Gradually, as banking undertakings diversified and became more complex and the products put forward by promoters became more sophisticated, risks also amplified and became more complex.

While, the risks from intermediation became more transmitive and transmissible, the evolution in the credit risk management failed to keep pace.

To my view, the failure of the banks to amass and question rough data/information on various elements of credit risk is one of the major reasons why the banks failed to foresee the looming problems that led to soaring NPLs at the end of the day. Unquestionably, any economist would argue that the macro-economic situation has a significant effect on the asset quality of banks.

The recent weakening in the asset quality is almost connected with the deceleration in the country’s growth rate, re-emphasizing the quoted argument about the cyclicality of asset quality of banks and its connexions with the macroeconomic performance of the economy.

But, a closer analysis at the trends in the growth rate of gross non-performing assets and in the way banks are steadily stabilising across Tanzanian banks indicate that the seed of wallowing in high levels of non-performing loans were outcome of reduced profit levels during 2016-2017 and time for shareholders to wear a broad smile is well documented as most of the asset quality indicators within banks starts to show an improvement in profit.

Thus, the decline in asset quality cannot be solely attributed to the recent decline in the country’s macroeconomic performance.

Moreover, with GDP growth rate, there are other causal relationships which are answerable for the current state of the asset quality of the banking system. I will now touch upon some of these aspects in brief.

Many financial institutions comprising banks are threatened with fresher challenges every time the prior ones are overcome. Some of the major challenges faced by banks today are, amplified regulatory scrutiny, changing customer behaviour, cultural change and cyber-crimes. One challenge that has been there, right from the time the world economy slowed down in 2008, is the reduced liquidity.

Many don’t agree but this was beginning of a major decelerator and the problem worsened, when the macroeconomic environment declined, leading to increased interest rates.

As the credit terms tighten up, the debt collection obstacles rose. Some of the biggest debt collection hindrances that the banks face today are when promoters (person or business) declaring bankruptcy.

When this happens, banks will have no options but to pause collection efforts. Legitimately, bankruptcy is a comprehensive and lengthy process. It can on occasion take years for a bank to receive money, if at all it does.

Numerous bad loans are suffered by banks due to this reason. Alternatively when borrowers failing to pay because of sincere reasons are few, while those that use manoeuvres including court cases to delay or flout payment are many.

Many banks have been using many working hours over these types of promoters, trying hard to access them and get them to communicate genuinely. Similarly, several debtors take over loans as business investment and then fall flat and the business collapses.

This prompts the debtor helpless and unable to pay off any loans. When a borrower fails to pay off his debts past the due date, the bank has to indulge in a lot of correspondence but if correspondence becomes overtly nagging, the bank risks losing out on its customers.

Giving a loan after client has complied with loans terms is the relatively easy part, but recovery in case of default is far more challenging. Acting before the loan fully goes bad is the key and that is only possible if loans are regularly monitored through multiple channels.

As loan collectors battles with debt collection deterrents, there are concerns about the functioning of the enforceability of legal provisions for recovery of loans.

While excessive delays hamper effective resolution on one hand, the time lag due to court unresolved cases erodes the value of recoverable assets.

I would like to conclude by reiterating that weak bank balance sheets have long been known to act as a strain on economic activity, especially in economies that rely mainly on bank financing.

A broad method to accelerating NPL resolution by Tanzanian banks is needed. In my opinion, such a strategy would have three main aspects. One, national regulators should tighten bank supervision.

Two, structural reforms are needed to make bankruptcy process more efficient and make it easier to collect debts and three; active markets in distressed assets need to be developed.

These three aspects should be paired and should be executed simultaneously for maximum effect. Meaning, more forceful supervision may increase the incentives of banks to sell NPLs at the margin, but may not be sufficient without a well-developed market for distressed debt.

Consecutively, creating such markets would be greatly smoothed by bankruptcy reforms that would increase collateral values and hence attract willing buyers.

Likewise, improving the quality of debtor particulars available at credit bureaus, linking credit bureaus with asset registers, and making these repositories accessible to private sector agents would help develop the market for distressed debt.

Ensuring that public creditors participate fully in debt restructuring would take away an important source of delay in many powers. And modifying some tax rules might be necessary to remove disincentives to provision or write off loans.

...A manifestation of limited understanding ...

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Author: Dr Hilderbrand Shayo

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