Why bad loans are going down

Monday May 20 2019

CRDB Bank shareholders follow proceedings

CRDB Bank shareholders follow proceedings during the 24th CRDB Bank Plc Annual General Meeting in Arusha on Thursday. PHOTO I FILBERT RWEYEMAMU  

By Rosemary Mirondo @mwaikama rmirondo@tz.nationmedia.com

Dar es Salaam. Commercial banks had charged off loans amounting to Sh43.346 billion until the end of March 2019 in compliance with the regulator’s directives on reducing nonperforming loans (NPLs).

In financial terms, a charge-off is a debt that is deemed unlikely to be collected by the creditor because the borrower has become delinquent. However, a charge-off does not mean a write-off of the debt entirely.

The ratio of NPLs to total gross loans dropped to an average of 10.4 per cent in 2018 from 11.9 per cent in 2017.

The Bank of Tanzania (BoT) recommends that NPLs should be at five per cent or less.

The BoT director of financial sector supervision, Mr Jerry Wambura, told The Citizen that the regulator, in its endeavour to ensure that the banking sector remains sound, stable and strong, had issued directives that required banks and financial institutions to write off all NPLs which have remained in loss classification for more than a year.

Following the directives, which were issued in February 2018 in apparent implementation of the International Financial Reporting Standard Number 9 (IFRS 9), banks charged off loans amounting to Sh43.346 billion by end of March 2019, substantially bringing down the level of NPLs.

But all was not lost for the banks as they managed to recover delinquent loans amounting to Sh31.972 billion, with some being upgraded to better classification. This also contributed to a reduction in NPLs. A delinquent loan is any form of debt for which a payment has not been made on time. As such, loans are considered delinquent immediately after the first payment is missed.

“Banks were able to recover Sh1.651 billion from the charged off loans. An increase in recovery of delinquent loans, which, in turn, led to a decrease in NPLs, can also be attributed to banks’ efforts to improve collection in compliance with BoT’s requirement of establishing recovery units and report on the progress quarterly,” Mr Wambura said.

According to Mr Wambura, a number of banks also decided to restructure their loan books following the BoT directive issued in February 2018. By end of March 2019, banks had restructured loans amounting to Sh85,198 million, with subsequently turning into performing loans.

Regarding improvement of credit administration and monitoring process, he said BoT required banks to formulate strategies, including re-assessing their operational capabilities in terms of credit processes, tools, data quality, system, staff, credit decision-making, internal policies, and other relevant areas whether they are adequate to ensure that lending and recovery are performed in a systematic manner.

“In response to this requirement, many banks reorganised and reconstituted their credit departments and the fruits of the process are now manifesting,” he said.

IFRS 9

Mr Wambura added that the adoption of International Financial Reporting Standard Number 9 (IFRS 9) in January 2018 required assessment of impairments throughout the life cycle of the credit exposure, which should be supported by robust impairment assessment models.

In view of this, banks had to increase loans impairment for the year ended March 31, 2019 according to the standard that requires more rigorous impairment assessment compared to the previously used standard – International Accounting Standard 39 (IAS 39). “Most banks were able to decrease their NPLs due to various measures taken by the central bank coupled with improvement in credit underwriting,” he said.

On the increase in banks’ profits after taking over the forex business, he said, like any segment of business, it is obvious that banks would expect to make a profit out of the bureau de change business, which entails the buying and selling of foreign currency.