Bad loans raise credit risk

Non-performing loans (NPLs)—the type of loans where the borrower is not making interest payment or repaying any principal—continue to rise, elevating the credit risk of the commercial banks.

This is despite commercial banks softening their lending rates over the past 12 months from 35 percent at the beginning of last year to between 23 percent and 25 percent this year, triggered by a cut in the policy or bank rate, now at 16 percent.

According to the Reserve Bank of Malawi (RBM) December 2017 Financial Stability Report, most banks reported an increase in NPLs across all economic agents compared to the previous survey.

Latest data from RBM show a 40 percent increase of NPLs by the households, a 50 percent jump by small and medium enterprises (SMEs) and a 40 percent increase for large enterprises.

Over the years, NPLs have become a risk for the banking sector, with most banks confessing that they continue to face challenges to recover from the toxic loans.

A similar study conducted by the RBM in June 2017 also indicated that NPLs in the banking system continued to remain high in the period largely dominated by wholesale and retail sector followed by manufacturing and construction sectors.

But in the context where interest rates have become softer, analysts argue that NPLs are most likely to  drop.

RBM spokesperson Mbane Ngwira yesterday cited dismally performing economy, credit policies within the banks and miscalculation of market trends as some of the reasons for rising NPLs.

He argued that the “recent increase could be temporal as the economy is recovering”.

But University of Malawi’s Chancellor College economics professor Ben Kaluwa said though it would take longer before banks recover from NPLs, the trend is expected to decline in the near future.

“NPLs become non-performing after a period of time because these are people who took loans some time back, but were stressed and did not service them.

“The trend in non-performing loans will, therefore, continue for now but taper once the lending rates continue to ease,” he said.

Weighing in, Consumers Association of Malawi (Cama) executive director John Kapito thinks there is a growing tendency by Malawians not to pay back loans, adding this is a major contributing factor to the increase in NPLs.

“We have so many accumulated loans because people simply do not want to pay back the loans, an indication that there is lack of financial discipline. People are not careful and respectful of what they borrow,” he said.

Violet Santhe, chief executive officer of Bankers Association of Malawi (BAM), a representative body of banks, noted that it will take time for banks to recover from NPLs.

“We have engaged various players on the problem and what came out clear is that there is a lot that needs to be done by a number of stakeholders if access to credit should become a reality for many businesses,” she said.

Santhe said there is poor credit culture among most businesses which results in high loan default and consequently low access to credit.

A Blantyre-based banker yesterday feared the rise in NPLs could compel banks to tighten lending regulations.

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