Governor of the National Bank of Rwanda, John Rwangombwa. File PhotoBankers downplay fears of rising non-performing loans Last year, commercial banks in Rwanda went on a lending spree that saw borrowing by the private sector rise by 35.6% by the end of December 2012.
Buoyed by liquidity from high profits made during the previous year, lenders thought it was time to earn even more--after all lending is their business. By the close of business on December 30, 2012, commercial bank loans to the private sector had hit a record Rwf747.3 billion.
However, the good news did not last long as the ugly face of non-performing loans started showing. Businesses and private individuals had borrowed the money, but some were finding it hard to service their debts.
Suddenly, the ratio of potentially bad loans jumped to 6.9% by the end June 2013 from 5.8% in December 2012. Figures from the regulator, the National Bank of Rwanda (BNR), show that the rise in NPL ratio had been on since September last year when it shot up to 6.3%, slightly dropped to 6% in December before rising again to 6.7% in March 2013 and finally hit 6.9% by the end of June, the highest in two years.
Even though the central bank and a leading banker have downplayed the effect of this on the highly liquid and resilient banking sector, the fact that the NPL ratio has come close to crossing the red line (BNR's 7% benchmark) signals a cause for concern.
When Claver Gatete, the minister of Finance and Economic, was still at the central bank, he set his eyes on reducing the occurrence of bad loans to 5% and below.
Either the risk assessment was inadequate or the economic activity during that period was not good enough to absorb that amount of credit, or both.
The permanent secretary ministry of Finance, Pichette Kampeta admits the first half of 2012 was not a particularly nice period for the managers of the Rwanda's economy. "The policy last year was very rocky [as we] took budget cuts... " she says in reference to
Government departs slashing budgets owing to delays in disbursements of budget support by donors over allegations that the country supports Congolese rebels, the M23. The government is often the biggest spender in any economy and therefore by far also the largest buyer of services.
When a government spends less, automatically very little money goes down to the private sector. And when the private sector is starved, business struggles and those with borrowed working capital will also struggle to meet their debt obligations.
According to the Kampeta, in order to fund national projects and keep the country functioning, the government borrowed more than anticipated from the domestic market which potentially opened another complication--reduction on the amount of credit available to the private sector.
Naturally, lenders prefer doing business with government because the risk of default is almost zero. Therefore when presented with the choice of either lending to a private business or to the government through Treasury bill, any banker will run for government paper.
It was therefore not surprising that having been stung by a sudden surge in non-performing loans, banks responded by scaling down credit to the private sector during the first quarter of this year. During the period, authorised loans amounted to Rwf220.5 billion--a decline from Rwf251.7 billion disbursed during the same period in 2012.
Indeed when the government left the domestic market and capped its debt after the issuance of the US$400 Euro bond, lending to the private sector bounced bank in the second quarter of the year.
The slight recovery saw banks lend Rwf122.9 billion to the private sector, up from Rwf 97.6 billion in quarter one with most of the credit going to commerce and hotels (48.8%), mortgage (19.8%) and manufacturing at 6.7%.
"This slowdown in new authorised loans was mainly explained by commercial bank policy to enhance their risk management following the excessively high increase in credit distribution registered in 2012," the central bank says in its Monetary Policy and Financial Stability Statement released recently.
Sanjeev Anand, the managing director of Rwanda Commercial Bank (BCR) and the chairman of the bankers association says there is nothing to worry about the rise in NPL ratio. "Sometimes it is just an issue caused by one or two big loans that may not be performing well," he says.
John Rwangombwa, the governor of BNR agrees. "There was a 35.6% increase in credit--which was very high. So [naturally] everything wouldn't go well. This trend is however going to be reversed, we are confident," he said adding that the issue "is not a big deal."
Liquid and resilient:
Indeed it may not yet be a big deal as banks continued to post high growth figures in all aspects of the business.
For example, despite a reduction in new loan disbursement during the first half of this year, total loans increased by 5.5% from Rwf747.3 billion at the end of December 2012 to Rwf788.2 billion at the end of June this year.
The banks also witnessed an increase in deposits by 11.5% to Rwf940.7 billion from Rwf844 billion during the same period.
As at the end of June, total assets of the banking industry had climbed to Rwf1, 381.2 billion compared to Rwf1, 247.7 billion as at the end of December 2012--representing a 10.7% growth rate.
"The growth in loans is an indication of the sector's performance in resource allocation to investors and good performance of the economy," BNR says.