The Bank of Namibia has relaxed conditions to enable commercial banks to have access to more cash and similar assets to increase their lending.
This will also enable banks to facilitate a loan repayment holiday and extend credit to different sectors to cushion the economy against the impact of Covid-19.
Central bank deputy governor Ebson Uanguta announced last week that the Bank of Namibia would loosen its grip on commercial banks' access to liquid assets and risk exposure.
Uanguta said the measures will enable the banking institutions to play their role in supporting the economy during these challenging times by providing flexibility for banking institutions to respond swiftly to the needs of their customers.
The relaxed regulations are the capital reserves requirement, concentration risk limit and liquidity requirement management.
This relaxation would allow banks to give loan repayment holidays for between six and 24 months, depending on the needs of the banks' clients (business and households).
However, loosening the regulations does not mean the central bank has imposed on the banks to give repayment breaks, as the extension of such breaks is at the discretion of the banks guided by their internal capabilities, the deputy governor said.
"In respect to customers of banking institutions, banks can grant a loan repayment moratorium or so-called payment holiday whereby the holiday in respect of a loan repayment (principal and interest) is allowed for a period of six to 24 months based on an assessment of economic and financial difficulties experienced by individual borrowers," the deputy governor explained.
To ensure the banks have enough extra cash to assist struggling businesses and households as revenues dry up, the central bank relaxed the limit of how much the banks' expected cash outflow can exceed inflow for a period of seven days.
However, the gap between cash inflow and cash outflow in the seven days should not exceed the cash equivalent above the 10% regulatory limit held by the bank.
That means banks can now extend credit to distressed businesses beyond their usual limits, allowing more sectors to access funding during this period of stagnant economic activities and revenue streams.
Secondly, the central bank has temporally abolished the capital conservation buffer to zero, which is an extra layer that protects the banks from various financial risks.
This means banks have been given the green light to take in more risks and unlock tied up cash to lend out to more businesses and sectors of the economy.
Risk management lecturer at the University of Namibia, Samuel Nuugulu said lowering the buffer limit will allow banks to maximise leverage as a lot of people will be expected to take out credits and the bank should have sufficient liquidity to fund such even if they are overexposing themselves.
"Corporate entities will be taking out huge overdrafts to pay salaries etc., so the banks should be allowed to take that much risk without any protection," he added.
Thirdly, the central bank has postponed the implementation of its 2019 regulation that limits commercial banks lending to single borrowers and a group of related parties to 25% of capital funds and not specific to sectors.
However, with the postponement of the 25% limit, "banks are now allowed to lend up to 30% of their capital funds to a single party or group of related parties, which gives them more scope to extend credit to vulnerable sectors during this time", the central bank said.
BANKS TO DECIDE
The Namibian reached out to analysts and market observers for comments on the impact of the package the central bank has given to the economy.
Financial analyst, Margareth Shikuyele said the relief measures look good on paper, but don't speak to the needs of the people at the bottom of the pyramid who are currently extremely vulnerable.
"It is discretionary and I don't know how generous the banks will be to the "nobody" tour guide/air hostess or waitress with only Grade 12 who has just been retrenched, or those who are immediately in the red financially because they live hand to mouth (the low-income level that caters to immediate and extended family needs)," Shikuyele said.
Namibia University of Technology economics lecturer Eden Shipanga welcomed the package as a well-thought initiative in the face of a situation that can cause a crisis in an economy.
He added that if individuals begin to panic and go onto a marathon of mass withdrawals then the banks may not be able to handle such cash outflow, especially from businesses, leading to limited cash inflow.
Economist Mally Likukela said the central bank's measures exclude the vulnerable group - who requires the support (the lower-income earners who can't afford even a loan, the unemployed masses and the poor people outside of the mainstream economy as well as the informal sector).
He explained that the central bank measures do not demonstrate how the demand side of the economy will be boosted apart from postponing the debt burden to the future.
Assuming that these measures were to be inclusive of all economic players (low income, informal traders, etc.), the measures will still fall short of addressing the supply side of the economy.
"In the absence of such activities the debt relief, etc. will have little material significance because there will simply be sufficient supplies for purchases with the boosted income or purchasing power afforded," he stated.
He advised that, instead of focusing only on the demand side, the BoN should also pronounce itself on what supply-side measures it intends to pursue.
"How will it influence commercial banks on the supply-side measures such as product maintenance, strategic stockpiling, temporary exemptions from tariffs and other import-related restrictions," he said.