RBZ rescues banks, proposes incentives

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Business Editor—

THE Reserve Bank of Zimbabwe (RBZ) has moved to cushion banks from increasing non-performing loans and proposed a removal of several bottlenecks to incentivise increased foreign direct investment in the country. Presenting the mid-term monetary policy statement on Monday, RBZ Governor Dr John Mangudya said the debt repayment capacity of borrowers remained under stress in the first half of the year due to the increasing cost of doing business emanating from the challenging economic conditions.

He said the level of non-performing loans (NPLs) rose from 15.9 percent as at 31 December 2013 to 18.5 percent as at 30 June 2014, a move he said had become a major hindrance to economic stability and growth.

“The Reserve Bank is pleased to advise that cabinet has approved the establishment of a national special purpose vehicle (SPV) known as Zimbabwe Asset Management Corporation (Pvt) Ltd (ZAMCO) to acquire NPLs from banks in order to clean up and strengthen banks’ balance sheets and provide them with the liquidity to fund valuable projects for the economy to rebound and to mitigate loss of confidence,” said Dr Mangudya.

He said banks would sell NPLs to ZAMCO under commercial terms, assigning collateral and all other rights attached to the loans.
ZAMCO, Dr Mangudya added, would be funded by a combination of non-funded lines of credit, new inflows, long term bonds and treasury bills.

“ZAMCO would manage the loan portfolio professionally in order to obtain maximum recoveries over time. Once restructured, the troubled assets will be sold and the proceeds will be used to retire the borrowing, treasury bills or the bonds,” he said.

“NPLs in an amount of $45 million have already been acquired by ZAMCO from three banks as at 15 August 2014. ZAMCO will be supervised by RBZ.”

The RBZ chief said the approach had worked successfully in countries such as Nigeria, China, Malaysia and South Korea, adding that the SPV structure involves sourcing of funds to purchase NPLs from banking institutions.

He said the new structure would rehabilitate and recover funds under the non performing portfolio.
“The Reserve Bank envisages that these measures will provide a holistic solution to the issue of non-performing loans in the banking sector. The restructuring of non-performing loans will provide relief to borrowers whose fundamentals remain strong but require reasonable funding costs and a tenure that can be accommodated in their cash-flows,” he said.

The reduction of NPLs, said Dr Mangudya, would help revive credit growth, spur activity of previously over borrowed clients and free up resources trapped in unproductive uses.
“This will bolster the supply side of the economy,” he said.

Dr Mangudya said RBZ would henceforth closely monitor cross border cash movement with individuals now restricted to exporting $5,000 per exit down from $10,000 through normal banking channels.

Other proposed growth stimulants include restraining importation of non essentials to protect the domestic economy, effective duty collection at the ports of entry, foreign investment promotion and removal of restrictions on capital remittances and a review of the external loan threshold.

The central bank has also proposed promotion of offshore investments, participation of foreigners in bond markets and increased Diaspora involvement in the Zimbabwe Stock Exchange.

According to the RBZ, the country’s NPLs exceed the international benchmark of up to five percent, a development that threatens financial stability and economic growth.

In Zimbabwe, the increase in NPLs is causing banks to cut on lending to business at a time companies require working capital and funds for retooling.

“This is now having a huge bearing on the economy as reduced credit is leading to a decline in economic growth, private consumption, job losses and a decrease in government revenue such as taxes,” said Dr Mangudya.

He said a quick fix to the problem was essential towards invigorating the economy, reversing the vicious circle of low economic growth, company closures and banks vulnerability.

The RBZ boss said research had shown a strong link that NPLs have led to a decrease in credit growth, which is undermining current economic recovery efforts.

Since 2009 when the country introduced the multiple currency system, businesses and individuals rushed to obtain bank credit to expand their businesses, which had been starved of cash during the hyper inflationary era. Most banks extended credit, which companies used for short term funding to purchase long term assets, thereby creating funding mismatches.

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