More regulatory interventions are required in the banking sector as defaulting loans are skyrocketing to an uncomfortable level for the financial stability of the country.
This is according to former Bank of Namibia (BoN) governor and new minister of finance Iipumbu Shiimi, in response to the commercial banks' increase in non-performing loans as a percentage of their loan books.
Bank of Namibia data by the end of 2019 shows the level of unpaid loans exceeded the central bank's red line of 4%, standing at 4,8% from the 3,6% recorded at the end of 2018.
By the end of March this year loans not being serviced increased to 5,2% of the total loan books of commercial banks, approaching the last benchmark of 6%, which is considered in an abnormal macroeconomic environment.
The majority of unserviced loans are housing and commercial space loans, accounting for N$3,3 billion of the N$5 billion non-performing loans.
Ipumbu says apart from regulatory intervention to avoid an unwarranted situation, the BoN as the regulator should ask commercial banks more questions during their assessments.
He says increasing defaulting mortgage loans "does not imply that banking institutions' performance has worsened".
It simply means more regulation is needed from the central bank to avoid an unwarranted situation in the banking sector, Shiimi says.
He agrees with The Namibian's analysis that NPLs have been increasing since 2016, but adds delinquency in payment is in line with the decline and weaker performance observed in the domestic economy over that period, which negatively affected borrowers.
He says properties and other non-performing loans levels are on the increase mainly because of the slowdown in economic activities, and that the Covid-19 outbreak has further expedited the deterioration of creditors' creditworthiness.
STIMULUS PACKAGE AT STAKE
Market observers fear the banks will start avoiding risks, which will jeopardise the rolled-out stimulus package of extending credit to firms and households.
As part of the package, the ministry has offered a guarantee to companies and households to borrow 0,08% of their previous financial year's tax payment to stimulate production and consumption.
"Businesses can borrow an amount equal to a twelfth of their tax payment in the previous tax year, to be repaid after a year," the stimulus package read.
It also indicated these loans would be extended at an interest rate below prime on the back of the government guarantee, capped at N$470 million.
"In cases where there is surety over a loan, the banks' terms are expected to be somewhat relaxed," Shiimi says.
He says banks would continue to conduct thorough assessments before extending credit.
Though banks will need to be cautious, he says they need to be "cognisant of the guarantees provision as well as the fact that the current situation affects everyone, and it will take all economic players' involvement to turn it around".
The stimulus package of N$2,3 billion guarantees, but off-balance-sheet government liabilities is to further support loan uptake on preferential terms by businesses and individuals.
"Banks should be on the lookout for profitable investment opportunities in the country and extend loans where appropriate," Shiimi says of how treasury would convince banks to extend credit to the private sector when they are not servicing their existing loans.
He says the banking supervision department at the central bank is entrusted with the regulation of the banking sector.
As such, the department, together with the Financial Stability Committee, conducts assessments on the performance of the banking sector and advise on relevant reforms.
"Any other lending means the commercial banks are employing will be guided by the relevant regulations as published by the central bank," he says.