Banks suffer more stress on rising bad loans, tight liquidity

CREDIT growth is slowing down on the back of increasing non-performing loans and tight liquidity which have undermined the ability of the banks to lend and may elevate potential risks on growth targets.

Credit to the private sector experienced slowest growth in recent years, reaching 16.6tri/- in 2016 up from 15.49tri in 2015, equivalent to 7.2 per cent growth in what indicates low increase in major economic activities,according to data released in various Bank of Tanzania (BoT) reports.

All major economic activities recorded a considerable decline in growth of credit relative to the corresponding period in 2015, with manufacturing, agriculture, and transport and communication experiencing negative growth, according to the reports.

The credit to private sector recorded a 24.8 per cent growth in 2015 up from 19.4 per cent in the previous year when it reached 15.49tri due to increase in major economic activities such as construction, information and communication, finance and insurance, and mining and quarrying.

According to World Bank definition, domestic credit to private sector by banks refers to financial resources provided to the private sector by other depository corporations (deposit taking corporations except central banks), such as through loans, purchases of non-equity securities, and trade credits and other accounts receivable, that establish a claim for repayment.

For some countries these claims include credit to public enterprises. While credit growth experienced slow growth last year, non-performing loans kept on increasing, putting banks more vulnerable to further decline in profits and impacting seriously on their assets.

The ratio of non-performing loans to gross loans increased to 9.5 per cent for the year which ended December 2016 from 7.88 per cent recorded at the end of December 2015, according to Bank of Tanzania Monetary Policy statement and Annual Report of the Directorate of Banking Supervision.

The country benchmark for NPLs is 5.0 per cent. According to Bank of Tanzania reports, rising nonperforming loans had elevated banks’ cautiousness to lending which also contributed to the slowdown in the growth of monetary aggregates.

The banking industry experienced increased tightening of the liquidity situation following government’s decision to enhance revenue mobilization and tight expenditure management amid declining foreign aid and the transfer of public institutions’ deposits to the Bank of Tanzania.

The tight liquidity situation, particularly in the first three months of 2016/17, was also mirrored in the general rise of the rate at which commercial banks lend cash to each other overnight (the interbank cash market rate) to an average of about 16.15 per cent in September 2016 from 12.76 percent in June 2016.

However, the liquidity situation improved subsequently following sizable liquidity injection through reverse repos, purchase of foreign exchange, foreign exchange swaps. The Bank of Tanzania also granted some loans to banks as a lender of last resort.

We reported last week that banks were holding a whooping 1.3tri/- of non-performing loans in the last quarter of 2016, an amount equivalent to 4.5 per cent of the total budget for the 2016/17 financial year.

The amount, which underscore the challenge of rising default risks by borrowers due to tight liquidity, is above total revenue collection by Tanzania Revenue Authority for January this year which reached 1.14tri/-.

It is also clearly beyond the amount set aside in the current financial year for the initial phase of construction of the standard gauge railway which begins from Dar es Salaam to Morogoro.

The government set aside 1.0tri/- during the current financial year for initial construction of the railway. The list of top five banks with largest amount of non-performing loans is led by CRDB bank which is the biggest in terms of assets and market shares.

It has largest amount of non-performing loans which reached 436.7bn/-. It is trailed by Tanzania Investment Bank whose non-performing loans reached 238.5bn/-, NMB Bank, the largest bank in terms of profitability which posted 84.3bn/-, NBC (75.9bn/-) and Standard Chartered Bank (65.6bn/-) On the ratio of non-performing loans to total loans, the top five are Tanzania Investment Bank (36.32 per cent), BancABC (34.5 per cent), CBA (26.16 per cent), EcoBank (16 per cent) and CRDB (13.5 per cent).

The government acknowledges the situation in the industry threatens financial stability of banks through deterioration of assets.

In their letter of intent to the International Monetary Fund that was published in January, the Minister for Finance and Economy, Dr Philip Mpango and the Central Bank Governor, Prof Beno Ndulu said the central bank has directed banks with high NPLs to formulate and implement measures to bring the ratio to at most five per cent.

Most banks have committed to take more aggressive measures in the recovery of non-performing loans; strengthening internal credit process and risk management by improving credit analysis including usage of credit reference bureau reports and monitoring processes; and renegotiating some of the repayment terms to provide more affordable and flexible repayment plans.

It is expected that execution of the plans will be completed within two years ending July 2018. Banks are required to submit quarterly progress reports, which will be used by the BoT to monitor banks’ progress in reducing NPLs.

In addition, the BoT will review implementation of the plans during on-site examination of respective banks, and will determine appropriate course of action depending on the status and position of each particular bank.

These may include suspending respective banks from issuance of new loans and requiring them to put more emphasis on loans recovery.

In addition, early this month, the Central Bank asked commercial banks to consider lowering their lending rates to help spark credit growth. The Central Bank cut its discount rate to 12 per cent from 16 per cent effectively from March 6, the first time it has lowered borrowing costs since 2013, after a steep drop in private-sector credit growth last year.

There were expectations that the move “will enhance credit growth and reduction in lending rates,” Prof. Ndulu said in a statement after a meeting with chief executives of commercial banks in Dar es Salaam.

Bank of Tanzania’s decision to slash the rate it charges commercial lenders to borrow from it -- one of its main monetary policy tools -- came after lending to the private sector recorded its slowest growth last year.

The International Monetary Fund warned in January that tight fiscal and monetary policies threatened Tanzania’s forecast for growth of around 7 percent in fiscal year 2016/17, which ends in June.