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Gabriel Masvora and Noble Ncube
COMPANIES that retrenched workers following the 17 July Supreme Court ruling are headed for a potential pitfall as financial institutions have indicated that employers who guaranteed salary based loans for the axed workers were liable to pay the outstanding amounts in the event that borrowers fail to pay the instalments.
This month will mark the first month when companies would stop paying salaries to the retrenched workers following the expiry of the three months’ notice. While in the last three months, retrenched workers who had secured loans from banks were honouring their monthly repayment instalments as they were still receiving salaries through banks, the situation will change when they stop receiving salaries.
At least 20 000 workers were retrenched following the ruling but according to estimates most of the country’s workforce has been mitigating their meagre salaries by borrowing salary based loans from different financial institutions. Reserve Bank Governor Dr John Mangudya, in his July monetary policy review noted that the banking sector’s lending remains largely skewed towards the individuals sector.
Of the $4 billion which financial institutions had advanced by June this year, 25,65 percent, which is the highest, was to individuals. Although the anticipated defaults by workers might not immediately affect the Non-Performing Loans (NPL) measure which RBZ said had gone down to 14,52 percent as at 30 June 2015 from a peak of 20,45 percent in June 2014, it is likely to show by the first quarter of 2016. NPL refers to the sum of borrowed money upon which the debtor has not made his or her scheduled payments for at least 90 days.
Nonetheless, players in the banking industry said they were not panicking over the anticipated defaults as companies that guaranteed those salary based loans would be liable to pay.
“Banks typically have safeguards built into loan contracts. Losing your job does not absolve you from paying your loan. Banks give loans to employees of stable companies normally against a guarantee by the employer, so if a company chooses to let the employee go, they will have to pay the bank the balance on their employees account,” said a banker with a leading financial institution.
“Banks also have recourse to third party guarantors as before giving you a loan, a bank will ask you to get somebody else to guarantee the loan, this person will be liable to pay if the original borrower gets into difficulties.”
Bankers Association of Zimbabwe president Mr Sam Malaba in e-mailed responses to questions was, however, optimistic saying the sector was still healthy and does not foresee the issue of retrenched workers affecting banks as much.
“The recent job losses obviously mean some customers will be lost, but it is a relatively small number, given the size of the banking sector,” he said.
However, a sift through some of the contracts banks used to advance loans to salaried workers show that the fine print point to companies who guaranteed some of the loans being liable to pay in the event of a default. The contracts are structured in such a way that it will be up to the company to determine how it will recover its money from the retrenched worker. The bank will simply get its money from the company.
A copy of a form which some of the banks gave companies to sign when the banks were giving out loans shows that companies would be liable to settle bank loans in the event of retrenchment.
“Should the employee be retrenched or resign within . . . months from the date of this letter, we UNCONDITIONALLY and IRREVOCABLY undertake to advice the bank and to pay the employee’s terminal benefits to the above stated account,” reads one of the contract banks sent to companies to sign as a guarantor.
Employers’ Confederation of Zimbabwe executive director Mr John Mufukari said although he cannot give a general picture of how different companies will handle the matter, it sounded like a normal business transaction that a guarantor inherits the liability of the borrower when he/she fails to pay.
“It is a normal business transaction. If you agree to guarantee a person and that person defaults, the bank will come to you,” he said, “Although I am not necessarily saying that this must be the position of all companies affected.”
Some company executives, however, said most loans were insured but according to some of the agreements the insurance does not cover defaults triggered by normal retrenchments. Some companies have tried to use the excuse that they only guranteed that workers’ salaries would be paid through the bank so that deductions could be effected, insisting the loan contract was between the bank and concerned individuals.
According to one of the agreements seen by Sunday News regarding insurance loans, a borrower pays insurance cost of 1,5 percent of the loan amount. But the agreement reads: “However, the insurance will only be activated after the borrower has either died, has been disabled or has been retrenched on health grounds.”
Zimbabwe Congress of Trade Unions secretary-general Mr Japhet Moyo said companies must pay for the loans and recover the money from terminal benefits.
“That is correct, companies who were guarantors have to pay the debt and then recover their money from terminal benefits which include pensions. However, where they are not able to recover anything then that means it was not a well thought out decision. Most of the debt is likely to be borne by the depositors’ money because most workers had not contributed enough to pension schemes to offset the debt,” said Mr Moyo.
He said companies erred by randomly retrenching workers without doing a background check or factoring in “some of these issues”. However, because of inflation which the country experienced before the use of foreign currency and the prescribed method for paying terminal benefits as mandated by the New Labour Act, the money might not be enough to cover the loans.
According to the amended Labour Act, companies are supposed to pay a one month salary for two years served.
For someone who had served five years and was earning $500, the highest he can get using the formula is $1 250.
However, when banks were offering loans they were in some cases multiplying the net salary by six which means such a person could have got a loan of $3 000 which will balloon to $5 000 because of the punitive interest rates. In such a case the terminal benefits would not be enough to cover the loan.
Confederation of Zimbabwe Industries president Mr Busisa Moyo said companies were struggling and might not have the capacity to pay workers.
“The state of many companies does not allow them to pay off the loans undertaken by retrenched employees. Banks should capitalise on the money that is supposed to be paid to the particular dismissed employee that is; two weeks salary for years worked, outstanding wages owed to workers and the three months’ notice salary,” he said.
CZI got support from the Zimbabwe Federation of Trade Unions. ZFTU secretary for economic affairs Mr Jacob Rice it was up to the banks to sit down with those who would have failed to devise flexible payment plans.
“There is no way companies can be liable to loans taken by retrenched workers. Companies are already facing difficult times. Job-cuts are a natural disaster, no one can be blamed as it affects every sector in the country. Banks need to sit down with their clients and come up with amicable resolutions on how the balances would be paid. There should be some sort of payment plan,” he said.
Because of the problems which have now arose because of the salary based loans, it has also come to light that some companies have stopped guaranteeing loans for their workers while some banks are now demanding commitment from employers that employees have long term contracts.
Bongani Ndlovu
Online Reporter