Windhoek — Despite stringent lending measures by local commercial banks there is an increase in non-performing loans (NPLs) resulting in bank defaults of N$1 billion.

All commercial banks have stringent procedures and when clients apply for loans they also make provision for bad debts or NPLs, but by the end of 2011 bad debts among Namibian commercial banks had accumulated to N$1 billion.

The cost of living has gone up while some people live beyond their means and these and other factors lead to the accumulation of bad debts.

When clients default on repayments banks often repossess their credit-financed cars, houses and even household goods such as furniture.

Banking in Namibia and the financial sector in general is an extremely competitive environment.

Four commercial banks have to compete for a very small population of just over two million people, with the majority still falling in the unbanked category, meaning they either do not have access to banks or have no funds to participate in the sector.

According to the Bank of Namibia, the total credit extended to Namibian households by local banks as of June 30 this year comprised 53.4 percent for mortgages, 19.3 percent for other loans and advances, 15.6 percent for instalment credit, 11.3 percent for overdrafts and 0.2 percent for leasing.

Data from the Bank of Namibia also reveal that there has not been any significant shift in the composition of loans granted.

This is with the exception of mortgages and overdrafts, where the former saw its proportion of total credit extension increase, while the latter declined.

As of June 30, 2012 unsecured lending accounted for 31 percent of total credit extensions, slightly below the historical range of 33 percent to 40 percent.

The change in other loans and advances is more pronounced and ultimately peaked in mid-2011.

The recent trend is that other loans and advances are declining, while lease financing, after reaching a trough in February 2012, is rising again.

Local stock brokerage firm, Simonis Storm Securities, suspects that the free-fall in lease financing is due to the reclassification of data.

Expansion in secured lending, which started in 2008 for mortgages and 2010 for instalment credit, continues to grow.

Instalment financing expanded by 18 percent each month during the first six months of 2012, while the average growth rate of mortgage debt averaged 15 percent in the first half of 2012.

Despite being at an elevated level, growth in mortgage lending remains below the pre-2008 levels.

"The contrasting trends in secured and unsecured debts are surprising. One possible explanation is that households are still de-leveraging from past debts and would rather incur secured debt, while maintaining low appetite for unsecured loans. Another explanation could be that, through flexible lending terms, banks are incentivising clients to swap unsecured products with secured ones," says Simonis Storm Securities.

There has been significant growth in aggregate credit extensions. The ratio of borrowing to Gross Domestic Product has on average increased by 10 percent annually.

Local credit extension and bank earnings have been growing annually at 12 percent and 10 percent over the last two and three years respectively. There has also been a slight up-tick in recent borrowing figures.

In 2010 and 2011, GDP grew by 6.6 percent and 4.9 percent, which are some of the strongest levels in recent years.

According to annual reports, FNB's NPLs edged lower by 7.4 per cent during 2011, resulting in the NPLs ratio of 2.1 percent (versus 2.5 percent during the 2010 financial year), thus bringing it below the desirable 3 percent.

Bank Windhoek's NPLs ratio remained flat at 1.5 percent indicating the equal proportional increase in NPLs and advances.

"Although the impairment coverage ratio declined marginally to 58 percent from 60 percent, we believe it is still appropriate," says Simonis Storm Securities.

Standard Bank, with a loans to assets ratio of 63 percent, is the most liquid among the commercial banks and its NPLs edged lower by 7.4 percent, dragging the NPLs ratio to 2.1 percent from 2.5 percent, suggesting its asset quality is improving.

Nedbank's NPLs declined by N$22 million, largely driven by non-performing mortgage loans and the net effect was a 0.5 percent decline in the NPLs to total loans ratio.

"The fall in the ratio implies that the bank is controlling its impairments. Similar to FNB, the impairment coverage ratio for Nedbank remains on an acceptable level of 82 percent," added Simonis Storm Securities.