Banks likely to be caught in liquidity crunch

said non-performing loans increased to 9,9 percent in June 2012 from 7,55 percent in 2011 against the internationally accepted Basel 11 threshold of 5 percent.
“The current scenario in the financial sector raises concerns over quality of corporate governance and effectiveness of supervision within the financial sector,” said Minister Biti.
Despite the increasing risk, loans and advances increased by 39 percent from US$2,74 billion in January to US$3,029 billion by May 2012.
This translates to a loan-to-deposit ratio of 84 percent compared to 87 percent by end of 2011, reflecting over-exposures of some banks, a situation that has resulted in high non-performing loans.
Zimbabwe’s banking system remains highly vulnerable with weakening capitalisation rising from non-performing loans, limited lines of credit and a tightening liquidity situation.
Liquidity remains a challenge due to the short-term nature of deposits, the absence of an active inter-bank market and lender of the last resort facility at the central bank.
Although nominal bank deposits continued to improve, during the first half of the year, the growth in the deposits have softened, reflecting overall slowdown in economic growth.
On a month-on-month basis, deposits were growing by an average of about 3 percent, reaching US$3,58 billion by May 30 2012 from US$3,1 billion in December 2011.
“The growth in deposits for the period under review was spurred mainly by receipts of resources from sales of SDRs, proceeds from the tobacco sales and the repatriation of excess balances from Nostro Accounts as required by the Reserve Bank of Zimbabwe,” said Minister Biti.
He said banks should come up with realistic interest rates on deposits.
During the first three months, interests on deposits were low, with savings rates averaging about 2,65 percent, 10,7 percent for one-month deposits and 12,4 percent for three-month deposits.
Lending rates, which opened the year relatively high, slightly softened from an average of 13,6 percent to 9,5 percent and 19,7 percent to 15,2 percent for commercial and merchant banks, respectively.
Low savings owing to low salaries and wages and low interest income against high operational costs further compound Zimbabwe’s financial sector.  There has been very little flow of fresh capital into the country as creditors sit on the fence due to both economic and political uncertainty.