Dar es Salaam. The International Monetary Fund (IMF) has cautioned Tanzanian banks against excessive use of the regulatory relief provided by the Bank of Tanzania (BoT) in February this year in dealing with non-performing loans as this could exacerbate the problem of “toxic assets” that bedevils the sector.
Non-performing loans, reduced credit and liquidity pressures still pose a great risk to Tanzania’s banking sector, and measures must be taken to rectify the situation. Early this year, the BoT took measures to reduce the burden of unpaid loans, which had reached up to 51 per cent.
BoT issued a circular entitled Measures to Increase Credit to Private Sector and Contain Non-Performing Loans, in which, among other things, it waved some provisions of Banking and Financial Institutions Regulations 2014 for two years up to December 2020 to enable banks to collect unpaid loans.
The central bank allowed banks to restructure NPLs up to four times from the two times as provided by the regulations. It also allowed financial institutions to upgrade restructured term loans once the borrower has paid two consecutive loan instalments. The regulations required banks to only upgrade term loans once four consecutive instalments had been paid.
BoT used these regulatory relief measures to enable creditors, who had been hit by economic hardships that were brought by a liquidity crisis in the economy, repay their loans in due time.
The central bank also took other measures to boost liquidity by cutting the discount rate three times in 18 months, from 16 per cent to 12 per cent in March 2017 and again to 9 per cent in August 2017 and further to 7 per cent in August 2018.
The interventions worked to improve the situation, but the state of affairs in the banking sector is still gloomy.
In its Financial System Stability Assessment report released on Thursday, the IMF notes that more should be done by the authorities to address the situation in the country.
“IMF directors noted that despite favourable macroeconomic conditions, financial stability challenges are significant with deteriorating asset quality, falling credit growth and liquidity pressures.”
It adds that the directors stressed the need to improve asset quality, address non‑performing loans and increase capital buffers in the banking system.
“In this context, they cautioned against potential excessive use by banks of the regulatory relief provided by the Bank of Tanzania’s circular for loan classification and restructuring. They encouraged the authorities to issue further guidance aimed at preventing banks from overstating capital ratios and earnings,” the report adds.