Non-performing loans in the banking sector increased by 69.9 percent in 2016, the Reserve Bank of Malawi (RBM) has shown in their 2016 Financial Institution Annual report.
According to the report, non-performing loans (NPL’s) were recorded at K74.4 billion in the year under review, up from K43.8 billion in the previous year. Consequently, the ratio of non-performing loans to gross loans and leases deteriorated from 10.7 percent in 2015 to 17.0 percent in 2016.
NPLs are those that borrowers are no longer making payments on. These types of loans are close to being considered in default, and on the verge of being written off and absorbed as a loss by the bank.
A high interest rate environment is one of the major factors that contribute to high levels of NPL’s. In the period under review, interest rates ranged from 32 percent to 37 percent across the country’s 10 banks.
However, interest rates have reduced significantly this year, with the weighted base lending rate across banks currently standing at 26.5 percent, thanks to the reduction of the policy rate.
In an interview, Bankers Association of Malawi (BAM) chief executive officer Violette Santhe said NPL’s impact funding costs as they reduce interest earning assets with the attendant risk of write off reflected through provisions.
While economist Gilbert Kachamba said an increase in nonperforming loans by 69 percent is quite huge and worrisome for a small country like Malawi.
“This impacts the economy negatively especially the financial sector. The NPLs bring stress in the economy as the financial sector is faced with an array of risks like liquidity risks, market risks and operational risks.”
“Now with the reduction in interest rates, banks must respond accordingly and favorably to this reduction and we expect the NPL’s to fall. Banks should also intensify in client screening to make sure that those who are accessing the loans have the ability to pay back,” he said.
NPL’s are indicative of assets that have become riskier and could become a loss. When a loan is made, it is considered an asset to the bank. As it is an obligation that is expected to be paid back to the bank, with interest, a loan goes on the asset side of a bank balance sheet.
However, despite the increasing NPLs the report shows that the banking industry remained profitable, registering a growth of 10.2 percent in aggregate profit after tax from MK33.4 billion in 2015 to K36.8 billion in 2016
largely on account of a 31.0 percent increase in interest income from K140.5 billion in 2015 to K184.1 billion in 2016.