Loan-to-deposit ratio drops

Bank deposits increased from US$3,1 billion to US$3,7 billion in February this year.
The African Development Bank, in its monthly report on Zimbabwe for April, said the decline in the loan-to-deposit ratio is a reflection of the prevailing non-performing loans, over-lending, over-borrowing and high anticipated default risk.
“The prevailing conditions point to a need for cautiousness on the part of both borrowers and lenders,” said the report.
“In an environment with high lending rates, overborrowing is risky as it easily results in high loan default rates.”
The loan-to-deposit ratio is used to calculate a lending institution’s ability to cover withdrawals made by its customers.
A lending institution that accepts deposits must have a certain measure of liquidity to maintain its normal daily operations.
AfDB said despite the increase in banking sector deposits, their composition remains unfavourable for long-term lending and investment.
“The composition of deposits suggests weak depositor confidence, hence the concentration in short-term deposits,” said the bank.
An increase in total deposits is associated with increases in all types of deposits, such as demand deposits, saving and short-term deposits and long-term deposits.
As at February 29, 2012 the composition of total banking sector deposits stood as demand deposits (59,6 percent), saving and short-term deposits (31,6 percent) and long-term deposits (8,8 percent).
The big five banks — CBZ, Barclays, Standard Chartered and Stanbic — control the biggest chunk of deposits. This leaves the 22 small banks scrambling for about US$1,2 billion deposits.
The banking sector still faces challenges, mainly liquidity shortages.
In the first quarter of the year, the Bankers’ Association of Zimbabwe prescribed a minimum loan-to-deposit ratio of 70 percent and banks operating below the rate were to deposit their excess funds with the central bank as part of measures to improve liquidity management.
This was meant to help ease problems in processing payments through the Real Time Gross Settlement (RTGS) system.
Other banks have placed a cap on withdrawals, raising fears of a cash crunch, reminiscent of the hyperinflationary era.
Analysts said the banking sector liquidity was a function of the export performance, which is presently constrained by lack of long-term credit, low capacity utilisation, high cost of funding and the power crisis, among factors.
Other challenges include limited inter-bank lending between strong and weak banks, small amount of the lender-of-the-last-resort facility and the short-term nature of the bulk of the banking sector deposits.
High bank operating costs, limited bank sources of income, limited range of domestic money market instruments and high bank credit demand against limited supply has continued to squeeze the sector.
Weak depositor confidence, limited external lines of credit, money circulating outside the formal banking sector and non-performing loans pose further threats to the sector.
An estimated US$2,5 billion is said to be operating outside the banking sector.