THE financial sector is facing a fresh crisis amid reports that the five biggest banks are sitting on costly treasury bill (TB) portfolios that could wipe out their accumulated capital, it was established this week.
While the looming crisis threatens the entire banking sector, sources indicated that it was the top five commercial banks -- Standard Chartered, Commercial Bank of Zimbabwe, Barclays Bank, Stanbic Bank and Zimbabwe Banking Corporation -- which were haemorrhaging from a raft of RBZ policies that could precipitate bank failures.
The five banks control close to 90% of all deposits in the financial services sector.
The situation has been compounded by the high statutory reserve requirements for commercial banks which have shifted huge amounts of deposits from the banking system, transferring them to the Reserve Bank. Commercial banks are understood to be holding large TBs in their portfolios, most of which have yields of around 200%.
However, the banks are financing their positions at rates in excess of 850% through the overnight accommodation facility of the central bank, creating big gaps between their financing costs and the cost of their TB assets. The TBs are difficult to redeem for cash until maturity, and this has forced banks to seek recourse to the central bank through the overnight accommodation window to fund short positions.
Under the current regime, banks that have surplus cash are forced to invest in two-year tenor bills with interest rates of 120% if they fail to buy TBs from daily auctions. This policy has been largely viewed as punishing banks that efficiently manage their liquidity positions.
The Bankers Association of Zimbabwe (BAZ) has written to Reserve Bank governor Gideon Gono expressing fears of a major banking crisis unless urgent action is taken. One of the BAZ memos to Gono noted that while smaller banks had been borrowing smaller amounts, these were nevertheless higher than before February.
"Merchant banks and buildings societies have been borrowing from their commercial banks but this is unlikely to go on for much longer in view of the liquidity strain on their banks," the BAZ memo to Gono, dated March 28, 2006, said.
It warned that developments from the RBZ's monetary policies were "a major concern to the industry and will, if not addressed urgently, precipitate bank failures within three months".
Following a review of statutory reserve ratios earlier this year, commercial banks are effectively paying out 58% of all their deposits to the RBZ, money that does not earn interest. Of the balance from the deposits, 76% has been locked up in TBs.
Bankers said the recent hike in the statutory reserve ratio had undermined previous initiatives ensuring viability of banking institutions. The low statutory reserve payments had been accompanied by the issuance of 180-day and 270-day TBs instead of funds being credited to each bank's position.
However, the recent change in policy has not provided for the redemption of the TBs issued under the old facility, or their liquidation.
The average yield on all TBs has been diluted by the impact of 728-day, 260-day and 270-day TBs.
This, at a time when the accommodation rate was very high, meant that most banks were carrying TBs, particularly those with tenor longer than 90 days, at huge cost, documents show.
The documents, which include correspondence between bankers and the central bank, indicate that big financial institutions are each picking up debts as high as $1 trillion daily through borrowings from the RBZ, with daily interest charges in excess of $500 billion. Some banks have paid up interest amounting to $1,5 trillion each between February and last month.
The Zimbabwe Independent understands that the central bank is in a quandary over the issue. While its latest measures have been aimed at addressing the concerns of the big banks, these have been rendered ineffective by its tight monetary policy aimed at reining in inflation, currently at 913,6% year-on-year for March. It is feared the inflation figure for April, blocked by government this week, is over 1 000%.
The RBZ, which recently revised upwards to 200% interest on current two-year TB stocks banks currently hold after representations from bankers, this week restructured its policy framework, saying it would start issuing only long-term paper with inflation-indexed interest rates, based on the average annual inflation rate, plus a margin.
Barely two days after the policy, the RBZ reverted to the initial policy framework by re-introducing 91-day TBs, but rejected bids asking for high yields.
But of concern to bankers is how the RBZ will determine inflation-indexed interest rates in the absence of updated inflation data.