GOVERNMENT's failure to pay suppliers for services rendered has contributed significantly towards the increase in Non-Performing Loans (NPLs), a bank executive has said.
An NPL is a sum of borrowed money upon which the debtor has not made his or her scheduled payments for at least 90 days.
According to the central bank, the banking sector's average NPLs to total loans ratio stood at 15,92% as at December 31 2013.
The increasing NPLs have resulted in the understatement of the level of provisions for bad and doubtful debts, thereby exaggerating a number of financial institutions' earnings and capital positions.
NMB chief executive officer, James Mushore said government was a big defaulter in terms of making payments to service providers.
"In different banks' NPLs, we have people who have supplied services to government. We are not directly exposed to government but we have businesses who have not been paid by central government due to cash constraints," he said.
He pointed out that government owed suppliers and some of these companies were put under liquidation after they failed to pay back to banks.
This problem, he said, could be traced back to central government.
"Whilst we have big NPLs, those don't take into account the security that we hold. So a lot of that is covered by securities but banks as a first port of call don't want to liquidate companies, they want to see whether they can be turned around or restructured," said Mushore.
In an electoral overture, government last year issued a directive ordering all municipalities to cancel all debts owed by residents backdated to February 2009.
In his 2014 national budget statement, Finance and Economic Development minister, Patrick Chinamasa acknowledged the domestic arrears to service providers saying they were undermining business operations of service providers.
During the period to October last year, total obligations to service providers amounted to US$97,1 million.
Chinamasa said government would reduce the stock of domestic arrears this year.
"Given the very tight resource constraints in the 2014 budget, we plan to eliminate the total stock of end 2013 domestic arrears by 2015," he said.
In order to address the increased incidence of non-performing loans in the banking sector, the Finance ministry said the Reserve Bank of Zimbabwe (RBZ), in conjunction with the Bankers Association of Zimbabwe (BAZ), would this year spearhead the operationalisation of Credit Reference Bureaux.
In her maiden monetary policy statement, RBZ acting governor, Charity Dhliwayo said the central bank had already drafted a credit reference bureau accreditation framework, which outlines minimum requirements.
RBZ also noted that under-capitalised banks were saddled with high levels of NPLs.
It said banking institutions were required to set aside adequate provisions that reflect the level of credit risk in their loan portfolio.