Reprieve for banks

ACTING Reserve Bank of Zimbabwe (RBZ) governor Charity Dhliwayo yesterday presented a monetary policy staked against a severe liquidity crunch as she gave banks relief from hefty capital thresholds that forced a scramble for offshore support. The move is unlikely to reassure bitter depositors, who have suffered great anguish since 2004 when over 20 banking institutions collapsed after alleged abuse of depositor funds and mismanagement.While extending the capital concession to an incapacitated sector, Dhliwayo acknowledged that lowly capitalised banking institutions usually resorted to abuse of depositors’ funds to meet operating costs.
The raising of capital thresholds was meant to stem this vice, which has resulted in low depositor confidence in the banking sector.
With Zimbabwe’s high dependence on commodities, Dhliwayo said plummeting prices had conspired with huge import absorption in the country’s frail economy to drain the banking sector of liquidity.

“I present this Monetary Policy Statement (MPS) at a time when the country’s economic landscape is facing increasing challenges,” Dhliwayo told an auditorium full of bankers, business executives and journalists at the RBZ offices in Harare.
Finance Minister Patrick Chinamasa and his deputy Samuel Undenge attended the MPS presentation, alongside RBZ board members who included economist Godfrey Kanyenze, chartered accountant Nyasha Zhou and retired High Court judge Justice George Smith.

After noting some of the challenges, notably an economic slow-down worsened by an expanding current account deficit, Dhliwayo said expectantly: “I remain optimistic that the economic prospects for Zimbabwe will not disappoint, provided we decisively and holistically implement all the ingredients as embodied in Zim-Asset.”
Zim-Asset is a government blueprint created to spearhead Zimbabwe’s economic revival.
 She highlighted that the banking sector – once the only seaworthy vessel in Zimbabwe’s stricken economy – remained generally stable but admitted there were “institution specific weaknesses” among surviving banks.
Dhliwayo said there were currently 21 banking institutions operating following the cancellation of Trust Bank’s operating licence last month. Another bank, Interfin, which she said had collapsed under the weight of insider loans, is still under curatorship.
Dhliwayo revised bank capital thresholds to early 2012 levels, giving existing banks significant respite.
Former RBZ governor Gideon Gono announced in July 2012 a steep increase in minimum capital requirements for commercial and merchant banks to US$100 million, from US$12,5 million and US$10 million respectively, while capital thresholds for building societies were hiked from US$10 million to US$80 million.
Dhliwayo said the capital levels would revert to the pre-July 2012 hike, but warned that strong capital bases were still pivotal for the banking sector’s ability to contribute meaningfully to economic growth and development through financial intermediation.
“Importantly, capital enhances a bank’s capacity to attract deposits and acts as a cushion against losses,” said Dhliwayo.
While a number of banking institutions have closed since dollarisation, with many twisting in the wind mainly due to mismanagement and underperforming loan portfolios dominated by insider loans, those remaining have struggled to mobilise sufficient funds to recapitalise and would find the RBZ announcement as a tonic.
Sadly for depositors, the situation in the sector appears worrisome: Recently, depositors have failed to withdraw their money from several sector players, dealing a heavy blow to depositor confidence which had already been low.
The acting governor contended that there were banks that still faced challenges.

“The banking sector is currently confronted with liquidity challenges which are manifesting themselves through constrained banking sector lending capabilities, high lending rates and failure to meet customer withdrawal requirements experienced by a few banking institutions.”
“Nonetheless, the few troubled banking institutions are of low systemic importance as they accounted for less than 10 percent of the banking sector’s total assets, total deposits and total loans respectively, as at 31 December 2013,” said Dhliwayo.

She noted that there had been “a deceleration in deposit growth,” but said this was hugely a reflection of the economic slowdown experienced last year.
She expressed concern over the fact that undercapitalised banks were saddled with high levels of non-performing loans.
“In addition, the ever-greening of non-performing loans has resulted in the understatement of the level of provisions for bad and doubtful debts, thereby overstating the respective institutions’ earnings and capital positions.”

“As such, banking institutions are required to set aside adequate provisions that reflect the level of credit risk in their loan portfolio. Within this context, the banking sector’s average non-performing loans to total loans ratio (NPLs/TLs ratio) stood at 15,92 percent as at 31 December 2013,” she said.
She said there had been deterioration in asset quality among banks. This, she suggested, was reflective of “the adverse operating macroeconomic environment and institution-specific deficiencies”.
“In addition, the mismatch between long-term funding requirements for the productive sectors and short-term volatile deposits has exacerbated asset quality vulnerabilities,” said Dhliwayo.
She said the RBZ had also noted the continued abuse of loans and advances by related parties, particularly, directors and shareholders, which has resulted in huge levels of non-performing insider loans.

To restore stability in the banking sector, the RBZ governor said several measures would be taken, among them enhancing the role of the RBZ; capitalisation of banks; consolidations and mergers among banks; dealing with insider loans and non-performing loans; and enhancement of supervision through amendments to the legal framework.
“The capitalisation of the Reserve Bank will pave way for the reestablishment of the Lender of Last Resort (LOLR) and banker to government functions. Importantly, as enunciated by the Minister of Finance and Economic Development in his 2014 National Budget, the Reserve Bank will resume its traditional function as the banker to government. Within this context, the Reserve Bank will host government’s Exchequer Account with effect from 31 March, 2014,” she said. 31, 2014 which would become applicable for the facility.
“The overnight accommodation rate will be the anchor interest rate that will act as a benchmark for market rates,” she said.
She said the growth in non-performing loans within insider loans was a worrisome development.

“Notably, as at 31 December, 2013, the level of total insider loans in the banking system was US$175,3 million (including Interfin). Of these insider loans US$117,4 million (66,97 percent) was non-performing. The growth in non-performing loans within insider loans is a worrisome development.”             newsdesk@fingaz.co.zw