Bank managers are working up the phones and adjusting their sleep schedules as they try to limit the damage that might hit their companies' bottom lines should some clients fail to pay back the money they borrowed, writes ALON MWESIGWA.
Commercial banks are watching up to Shs 1.6 trillion in loans that are in the process of going bad as Uganda's economic recovery takes longer than expected, Bank of Uganda has said.
"Loans under watch remain high at Shs 1.6tn," said BOU, which noted that non-performing loans had declined to 6.2 per cent in June 2017 from 10.5 per cent registered in October 2016. The total loan book is Shs 10 trillion as of June 2017, according to Bank of Uganda.
Loans under watch are those that are past their repayment date and have nearly exhausted the grace period of 90 days. Non-performing loans (NPLs) refer to those that are past both their repayment and grace period of 90 days.
In short, loans under watch have a likelihood of becoming non-performing. When a loan becomes non-performing, it means it cannot be recovered.
At the close of last year, the defunct Crane bank accounted for 20 per cent of the non-performing loans in the market. NPLs grew by 110 per cent from Shs 573bn in 2015 to Shs 1.2tn as at the end of 2016, according to Bank of Uganda.
Stanbic bank said early this year the growth of non-performing loans was due to the fact that local manufacturing firms and services struggled through 2016.
The central bank said in its monetary report for August 2017 "while demand for credit remains high, the supply remains subdued."
This is because lenders are taking caution to give out money with tight scrutiny of the borrowers.
"There is significant disparity between the value of loan applications and approvals," the central bank said.
BOU has since last year in August cut the central bank rate, a benchmark rate which shows the direction interest rates take, by 700 basis points to ten per cent, where it was stayed for a second time last week.
This means that the cost of borrowing should gradually come down. This also means that since most people borrow on floating rates, an easing in monetary policy would see the interest they have to pay on their loans drop.
However, this has not been the case. The drop in lending rates has been slower than expected, with prime rates dropping to only 21 per cent on average from 25 per cent a year ago.
Together with the slow recovery in economic activity, it means people are finding it harder to service their loans. This has made banks to tread carefully before they issue out loans.
"[There is] modest private sector credit (PSC) growth despite sustained monetary easing in part highlighting supply-side constraints," said BOU. "Demand for credit remains robust while supply remains low."
Agriculture biggest culprit
The agricultural sector leads the pack with the highest number of non-performing loans, at 23 per cent. The sector was majorly hit by prolonged drought that battered most parts of the country, affecting farmers' harvest.
Trade and commerce followed with 17 per cent of NPLs.
Traders were affected by the geopolitics of the day with instability in South Sudan and unrest in DRC, Uganda's two main export markets.
The slowdown in the economy meant that demand at home was also low. This has seen a lot of businesses, especially in the retail market, fold. Companies such as Nakumatt supermarket is winding down business in Uganda.
Meanwhile, building and construction had 17 per cent of NPLs due to a slowdown in the real estate sector. This has been visible in the tens of empty buildings around town.
Personal and household loans accounted for 13 per cent of the NPLs. The central bank hopes low lending rates will see a rebound in growth.
BOU Governor Emmnauel Tumusiime-Mutebile said on Friday that economic activity gathered momentum in the first half of 2017.
This prompted the bank to revise upwards the growth forecast from 4.5 per cent to between five and 5.5 per cent.
"Increased activity in agricultural sector due to improved weather conditions and fiscal stimulus outlined in the national budget 2017/18 [will push up growth]," Mutebile said.
The slowdown in the economy had also been due to a fall in foreign direct investment which dropped by half to $500m in 2016/17 financial year, according to Dr Adam Mugume, the executive director for research at BOU.
He said FDI was down because of slow growth in developed countries and lack of activity in Uganda's oil and gas sector.
There are indications that the oil sector will be vibrant going forward after President Museveni and Tanzania's President John Pombe Magufuli laid the foundation stone for the construction of the crude oil export pipeline from Hoima to Tanga.
An active oil and gas sector is expected to pull more FDI into the country.