RBZ will not save insolvent financial institutions
TROUBLED banks could be hung out to dry by the Reserve Bank of Zimbabwe (RBZ) after acting central bank chief Charity Dhliwayo said the institution's lender-of-last-resort facility will not accommodate insolvent banking institutions.
In her monetary policy statement presented at the RBZ Dhliwayo hinted the systemic importance of troubled banks was low judging by the institutions' assets and deposits, an indication the central bank was prepared to let such institutions fail.
"Nonetheless, the few troubled banking institutions are of low systemic importance as they accounted for less than 10% of the banking sector's total assets, total deposits and total loans respectively, as at 31 December 2013," Dhliwayo said.
"With a well-funded lender-of-last-resort facility, the Reserve Bank will accommodate solvent banking institutions experiencing temporary liquidity challenges against acceptable collateral as specified in the Banking Act [Chapter 24:20] and the Reserve Bank of Zimbabwe Act [Chapter 22:15].
"It is envisaged that banks will progressively reduce the quantity of precautionary cash balances they currently hold either as cash or Real Time Gross Settlement (RTGS) account balances and, therefore, provide more funding to productive sectors of the economy."
Dhliwayo said while the interbank market had generally remained inactive as reflected by sizeable surplus positions at some banks, other institutions experienced acute liquidity shortages. For instance, average money market surpluses exceeded US$250 million in 2012 and 2013, she said.
"The banking sector has remained generally stable despite the various underlying macro-economic challenges and institution-specific weaknesses," she said. "The banking sector is currently confronted with liquidity challenges which are manifesting themselves through constrained banking sector lending capabilities, high lending rates and failure to meet customer withdrawal requirements experienced by a few banking institutions."
RBZ figures to December 31 show that total banking sector deposits amounted to US$4,73 billion, while loans and advances were US$3,70 billion.
"Notwithstanding the deceleration in deposit growth, the loans to deposit ratio increased from 37,33% in June 2009 to 78,29% as at 31 December 2013," she said.
Currently, there are 21 banking institutions operating in the country (including the Post Office Savings Bank, following the cancellation of Trust Bank's operating licence on December 6 2013.
A total 146 microfinance institutions are operating in the country.
Apart from the liquidity problems besetting some banks, Dhliwayo noted that non-performing loans were high on the books of such banks.
Dhliwayo also confirmed long held suspicions that banks were understating the level of non-performing loans. She said: "It is also notable that undercapitalised banks are saddled with high levels of non-performing loans. In addition, the ever-greening of non-performing loans has resulted in the understatement of the level of provisions for bad and doubtful debts, thereby overstating the respective institutions' earnings and capital positions."
Dhliwayo further stated that banks were now required to make adequate provisions that show the level of credit risk on their loan books.
"As such, banking institutions are required to set aside adequate provisions that reflect the level of credit risk in their loan portfolio. Within this context, the banking sector's average non-performing loans to total loans ratio (NPLs/TLs ratio) stood at 15,92% as at 31 December 2013," she said.
"The deteriorating asset quality is also reflective of the adverse operating macroeconomic environment and institution-specific deficiencies. In addition, the mismatch between long-term funding requirements for the productive sectors and short-term volatile deposits has exacerbated asset quality vulnerabilities."
The central bank said the growth in non-performing loans within insider loans is a worrisome development.
"Notably, as at 31 December, 2013, the level of total insider loans in the banking system was US$175,3 million (including Interfin). Of these insider loans US$117,4 million (66,97%) was non-performing.
The growth in non-performing loans within insider loans is a worrisome development," said Dhliwayo.
"Previously, the Reserve Bank would net out insider loans from banks' capital. These measures, however, were not effective in deterring banks from extending insider loans."
She said some banking institutions are facing challenges including undercapitalisation, high levels of non-performing loans, poor earnings performance and liquidity constraints.
Dhliwayo said banking institutions facing challenges must take concrete steps towards the implementation of consolidating, merging, dilution of shareholding by potential investors and converting their banking licences to deposit taking microfinance institutions (microfinance banks).
While she cut undercapitalised banks some slack by extending its initial June 2014 deadline for banks to have met minimum capitalisation requirements by six years to December 2020, in the whole she presented a tougher position on banks. -- See A3.