Business News

‘Bad loans to Worsen credit risk’

A local market analyst has warned that high levels of non-performing loans (NPLs) in the country threaten monetary policy’s efforts to reduce the cost of borrowing as increasing bad loans increases credit risks.

In an interview on Wednesday, the analyst, Cosmas Chigwe, observed that with the new reference rate system, which all banks follow now, all banks charge premium based on a customer’s risk profile.

He said: “This country still does not have a proper credit reference system which should hopefully improve with the National ID system. All banks do is charge premium based on a customer’s risk profile.

“The non-performing loan rations in the country are simply too high compared to other countries, especially in the retail banking space. Banks simply want adequate compensation for taking on this risk.”

Chigwe said, as a result, the recently reduced policy rate, from 13.5 percent to 12 percent, could have less impact on reducing the cost of finance if NPL levels remain high.

Reserve Bank of Malawi (RBM) June 2020 Financial Stability Report figures indicate that the level of NPLs in the banking system increased to K43 billion as at end June 2020 from K40.3 billion in December 2019 due to a slowdown in economic activity owing to Covid-19 pandemic, which has among other things, resulted into massive retrenchments by companies, coupled with, political instability in the first half of the year.

The foregoing factors resulted in deterioration in loan repayment capability by most borrowers across all economic agents.

Further analysis of economic sectoral NPL composition showed that most banks reported that the highest levels of NPLs were held by the wholesale and retail sector, followed by the community, social and personal services sector; construction sector; agriculture sector, and transport sector.

Quantitative statistics show that NPLs for the wholesale and retail sector continued to be the highest at K14.6 billion out of the total NPLs of K43 billion recorded as at end June 2020, relatively unchanged from K14 billion out of the total NPLs of K40 billion registered in December 2019.

In its July 2020 Malawi Economic Monitor, World Bank warned that the Covid-19 pandemic would increase levels NPLs due to liquidity challenges which in turn, could affect banks’ profitability and capital adequacy while the lending growth could decline.

Reads the report in part: “Lending is concentrated in a few sectors such as wholesale, agriculture and manufacturing, and some banks have high exposure to single clients.

“A downturn in any of these sectors or firms could lead more loans to become non-performing.”

Speaking during a media briefing in Mzuzu on Friday, RBM Governor Wilson Banda said following the adjustment in the policy rate, the cost of borrowing from commercial banks was expected to reduce as the banks and the market will respond, thereby stimulating economic activities.

Related Articles

Back to top button