Fly On The Wall
Reserve Bank of Zimbabwe (RBZ) governor, Dr John Mangudya’s statement that there is need for caution against lending and borrowing in US dollars, has been met with mixed reactions.
Some economic agencies are siding with the governor while others are saying if Mangudya’s warning is heeded, it would stifle growth as borrowings are needed for working capital and expansion.
Speaking at a recent breakfast meeting in Harare, Mangudya said loans that are being taken up by businesses at 15 percent are expensive and would be difficult to repay given falling margins.
“Where are you going to get a 15 percent markup to pay the loan?
“Mark-ups have fallen in this economy, so it means that this issue around dollarisation is a wrong discussion because what we need to say is: Do we have capacity to continue with dollarisation?
“What I am trying to paint as a picture is that we have no capacity,” he said.
Mangudya said with margins falling firms would struggle to “pay those loans”.
“They are going to cause non-performing loans so the banking sector instability will come in.”
Mangudya said borrowing in foreign currency without a plan for repayment could lead to a loss of assets and economic recession.
Some market observers have sided with Mangudya saying the economy does not have enough forex to support the balance sheets banks now have following US dollar lending.
They argued with falling margins across the economy, borrowers will default on their USD loans which will push up non-performing loans as happened in 2014 when the RBZ ended up establishing the Zimbabwe Asset Management Corporation (Private) Limited (ZAMCO) to deal with the bad loans. This is after non-performing loans at Zimbabwean banks had swelled to 18,5 percent of total loans, or US$705 million.
A high level of bad debt is seen as a key threat to the country’s banking industry.
The other risk is banks defaulting on honouring deposit payments as happened in 2016 when withdrawals were limited to as low as 20 dollars per day as long cash shortage got worse.
This eventually led to de-dollarisation following the introduction of bond notes in 2016 as a corrective measure to crippling cash shortages.
Others, however, believe the central bank governor must let the banks be and not encourage disintermediation. Their view is that banks would be prudent enough to only lend to projects with a return on investments higher than 15 percent.
They also believe that banks would have learned their lesson during the early dollarisation era when non-performing loans ballooned to unsustainable levels only to be bailed out by ZAMCO while some borrowed entities lost equity to ZAMCO which the latter eventually disposed of. Sugar producer starafrica corporation is one such company.
They believe the central bank governor’s remarks must be viewed as nothing but the desire to see banks doing much more thorough risk assessment of USD loan applications for working capital loan and fixed capital investments — in order to keep NPLs (of both USD and ZWL loans) in check.
Others are, however, not taking the governor’s remarks lightly, but as an attempt to overregulate banks not to lend yet the economy has largely dollarised while at the same time, businesses that cannot borrow at the punitive ZWL interest rates are now facing limited loan supply for operations and expansions.
They argue the loans are subject to credit committees while at the same time, banks have risk-based capital with provisioning overlays including collateral. Lending is risky that’s what banks do, they mitigate risk, they argue.
“You can’t have a central bank governor telling banks not to lend. He will be the same one complaining about the profit being non-interest income and revaluations. If an all-in 15 percent interest rate is acceptable why should anyone say otherwise?”
Besides, they argue, the lending environment has significantly changed over the years. IFRS 9 has increased the overlays and banks exercise a lot more prudence in lending. Furthermore, the lending is secured through real assets via a mortgage, NGCB, etc.