Brace for spike in NPLS, banks warned

The increase in lending interest rates is likely to lead to a spike in Non-Performing Loans (NPLs) and economic stagnation as most companies will struggle to service existing loans.

Industry and economic commentators said this in separate interviews following the proclamation by the Reserve Bank of Zimbabwe this early this week that interest rates with effect from Friday are now pegged at 200 percent.

The monetary authorities raised the interest rates in line with the annual rate of inflation, which in June stood at 191,6 percent from 131,7 percent the previous month.

The increase in interest rates from 80 percent, RBZ has said, is aimed at curbing
manipulation and speculative borrowing.
The Confederation of Zimbabwe Industries (CZI) president, Kurai Matsheza said: “Whilst
in broad principle we understand that interest rates have got to be positive, our worry
and big concern is to apply that retrospectively. Old loans should not be covered by the
200 percent rates.
“This is a serious shock to any business which would have taken that loan on a different
set of conditions.”
He said the meaning of that shock is that prices of products and services would also
increase in response as the costs are passed on.

“With such changes a lot of businesses are going to be affected and going forward will be
carefulto get loans.

“This obviously slows expansion and production output. With such an outcome growth
projection for the broader economy will be missed,” said Matsheza.

CZI immediate past national vice president Joseph Gunda, added his voice adding that
while the objective to raise the interest rates by that margin is aimed at curbing
speculative borrowing, it was not guaranteed the objective will be achieved going into the
future.

“But generally, the view is that the 200 percent increase on interest rate will choke
companies with existing loans.

“The knock-on effect is that companies will have to streamline operations especially
those that have been relying on borrowing from the banks and once there is streamlining
of operations, it effectively leads to economic stagnation,” he said.

Gunda said the latest interest rates policy will also have a direct impact on the
performance of the banking sector.

“At 200 percent, honestly who will borrow, and if that happens it also means the banking
sector will be badly affected as their profitability is largely driven by lending,” he said.
An economic commentator, Victor Bhoroma, said the increase in the bank policy rate has
been pegged in tandem with the rate of inflation but going forward, inflationary
pressures were likely to continue rising to the extent that lending rates will not keep
pace.

“If you look at the adjustment in terms of the bank rate policy which is the interest rate
from 80 percent to 200 percent, it’s actually following the annual rate of inflation as
announced by Zimstat.
   
“The immediate impact and the rationale for doing that was to limit the level of
speculative borrowing, money creation . . . but when you look at it going forward
obviously, the inflation rate is going to surpass the 200 percent mark and the monetary
authorities cannot adjust interest rates in each month.

“So what it effectively means is that the adjustment in terms of the interest rate is not
going to have any effect at all in terms of borrowing.

“What it might lead to would be an increase in Non-Performing Loans (NPLs) because
remember businesses who already have had loans might find it difficult to repay at that
particular (200 percent) interest rate.

“But pertaining to new loans, it’s not going to have an effect,” he said.
Bhoroma said Zimbabwe’s inflation was largely driven by money supply because RBZ was
undertaking quasi-fiscal operations.

“When you look at the rate of inflation in Zimbabwe, it’s a monetary phenomenon.
Inflation is caused by money supply largely because of the Central Bank performing quasi
fiscal operations and credits that are done for export payments.

“Inflation will continue rising and for the month of July it will likely be 250 percent or
above,” he said.

Another economic commentator Sharon Mpofu concurred with Bhoroma adding that the
latest interventions by the monetary authorities do not promote a savings culture.
This, she said, was because of a big gap between lending and savings rates, bank clients
will be discouraged from creating savings.
   
“The Central Bank though it raised the savings rates to 40 percent per annum from 12,5
percent, the move is likely to discourage people from investing in long term deposits.
This is precisely so because the disparity between the two interest rates is colossal,” she
said.

A financial market analyst George Nhepera said: “While it’s too early to comment, the
market is of the opinion that these measures are based on well-grounded research aimed
at achieving their intended objective including advancing the economic and social benefit
to the general members of the public and private sector.”

He said the challenge with the current upward review of interest rates up to 200 percent
is that it is already in violation of the in duplume rule.

“In deplum rule, is a law which states that it is illegal to charge an interest which results
in interest payment being more than the original principal amount given as loan.
“In my view, the upward review is likely to curtail or significantly reduce lending in local
currency by the financial players and shift the same to lending in US dollars.

“The borrowers with existing loan arrangements are expected to quickly repay their loan
obligations in a bid to reduce their exposure to the new and high interest rates,” said
Nhepera.

Bankers Association of Zimbabwe president Fanwell Mutogo would not be reached for
comment as his mobile phone was not being answered

However, former CBZ chairman Luxon Zembe said as a result of the latest policies, banks
were bound to face viability concerns.
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“In terms of the impact to the banking sector, the disparity between the lending rates
and savings rates is going to worsen the discouragement of a savings culture which has
already not been there. And given that one of the major sources for investment is savings
from the banks and if people are not depositing their money, it means banks are going to
face viability concerns,” he said=eBusiness Weekly