Bad debts could reduce bank profits

likely to reflect the negative effects of their huge loan books.
Deposits have remained the main source of funding for bank assets and on average deposits account for more than 70 percent of bank assets while the bulk of assets are concentrated in loans to customers.
Banks experienced increased credit and liquidity risk since dollarisation resulting in high levels of non-performing loans both for individuals and corporates.
Increasing non-performing loans remain the biggest threat to the banking sector because as they are depositors’ funds.
Banks are then forced to write off non-performing loans and this threatens the affected bank’s chances of meeting the central bank’s capital requirements. Most of the banks have, however, met the RBZ capital requirements save for five institutions that have been granted an extension.
Liquidity of some of the banks has also been affected by the acquisition of assets, which tied down financial resources.
Economic analysts yesterday said the high rate of defaults would affect profitability, as banks have to absorb the costs adding that under such conditions, the central bank should be capacitated to deal with any risk that arises.
“Huge non-performing loan books are a threat to the existence of a bank and reduce confidence in the banking sector in an environment with liquidity challenges where the central bank cannot bail out banks,” said the analyst.
Banks have also succumbed to persistent liquidity challenges and low deposits resulting in most banks finding it difficult to move funds.
When calculating doubtful debts banks use different ratios but within the range that is stipulated by the Reserve Bank of Zimbabwe.
Ratios vary depending on the quality of clients. If a client has got a clean repayment history the loan is not classified as a non-performing loan.
Banks are exposed to high liquidity and credit risk despite increasing lending to the private sector.
Rapid credit growth creates heightened credit risk which makes banks vulnerable to this scenario.
Liquidity challenges may trigger bank run and contagion effect, leading to general loss of confidence in the banking system.
There are growing fears that non-performing loans could rise while weakly capitalised banks may not withstand significant loan loss.
Analysts added that the proposed US$100 million fund to strengthen the central bank as the lender of last resort should come as a matter of urgency.
One analyst said the banking sector has performed well since 2009 given the absence of the lender of last resort.
“In the absence of the lender of last resort or functional money market exposes banks to greater liquidity risks,” he said.
In addition, a transitory deposits base makes it difficult to on-lend on a long-term basis.
High bank charges and wide interest rates disparity between deposits and lending rates also discouraged savings.