The Reserve Bank of Malawi (RBM) says it is targeting to cut non-performing loans (NPLs) or bad loans to the minimum regulatory requirement of five percent by December this year, backed by its continued monetary policy efforts and continued improvements in economic indicators.
The level of bad loans has over the years continued to increase, ultimately elevating the credit risk of the banking sector.
For instance as at September 2017, most banks reported an increase in bad loans across all economic agents with figures showing a 40 percent increase in bad loans by households, 50 percent increase by small and medium enterprises (SMEs) and 40 percent increase by large enterprises, according to RBM Financial Stability Report.
But speaking on the sidelines of the launch of Monetary Policy Technical Forum in Blantyre on Friday, RBM Governor Dalitso Kabambe observed that the economy is moving in the right direction, saying bad loans have and will continue to ease in the short to medium-term.
“Many challenges that were in the financial sector are now unwinding and correcting. The issue of NPLs which were at as high as 19.9 percent are now at 12.7 percent as at May.
“As we continue to engage various players in the financial sector coupled with our continued monetary policy efforts in a bid to create a robust financial system, we are forecasting to bring the level of NPLs to five percent,” he said.
Kabambe gave an example of one bank which had bad loans of about 68 percent as at December last year, but has now improved to 13 percent. He said this means that most bad loans have now become performing and unwinding.
He said: “Companies are now able to borrow and service their loans. On the other hand, credit in nominal terms has also started growing.
“In our analysis, when the policy rate is reduced, it takes out as much as eight quarters for that policy reduction to filter through the economy, thus, with the good macroeconomic environment conditions, the economy should continue to improve.”
Bankers Association of Malawi (BAM) president Paul Guta said a number of fundamentals are pointing to a positive trend.
“If you look at the market now, NPLs are now beginning to take a positive trend. Now that interest rates are easing off, we are now beginning to see a culture where customers are opening up to paying back loans.
“This is helping a lot as it has seen an improvement in the balance sheet, profitability and an improved and strengthened quality of lending in the sector,” he said.
However, Guta, who is managing director of Nedbank Malawi, said there is still more room for improvement, adding that getting to five percent will mean more gains.