Reduced economic activity fuels bad loans—Report
Elevated levels of non-performing loans (NPLs) above the recommended regulatory ceiling due to reduced economic activity in the face of Covid-19 threatening the country’s microfinance sector, a Reserve Bank of Malawi (RBM) report has shown.
The 2020 financial institutions annual report by the central bank, which assesses financial institutions for the 12-month period from January to December 2020, indicates that the sector recorded an expansion in bad loans that ultimately affected the asset quality of the sector.
“Asset quality as measured by the NPL ratio deteriorated during the year under review. NPL ratio increased to 12 percent from 4.3 percent in 2019. This was above the industry benchmark of five percent,” said the report.
According to the report, the increase in the NPL ratio was due to relatively higher growth in the NPLs than gross loans which grew by 2.8 percent to K14.7 billion in 2020.
Over the years, NPLs have become a risk for the Microfinance sector, with institutions under the sector highlighting that they have been facing challenges in trying to recover from the toxic loans.
An earlier study conducted by the RBM indicated that NPLs in the sector were also high largely due to the decrease in gross loans.
University of Malawi economics professor Ben Kaluwa in an interview observed that the trend is likely to continue as the economic environment remains depressed and people are not generating enough income.
He said: “NPLs have indeed become for MFIs. These are the loans that people who took some time back, but were stressed and did not service them.
“Now that the economy is depressed with the Covid-19 pandemic, the trend in non-performing loans will, therefore, continue for now and only taper once the economic environment improves for the better,”.
The report further shows that the lending ratio decreased to 326.7 percent in December 2020 from 340.5 percent in December 2019 as a result of the sub-sector’s heavy reliance on borrowed funds to finance loans.
