Analysis: MWENYA CHITALU
NON-PERFORMING Loans (NPL) risk management does not lie in high, exploitative and inequitable interest rates as it is being construed by the Bankers Association of Zambia (BAZ) and the Banking and Financial Services (BFS) providers.
Neither are low and unprofitable lending rates beneficial to the economy and lenders, but rather a robust NPL risk management lies in optimal rates that can sustain economic equilibrium and stability to spur an all-inclusive national economic growth and development.
A non-performing loan, or NPL, is a loan that is in default or close to being in default. Many loans become non-performing after being in default for 90 days, but this can depend on the contract terms.
A myriad of variables should be at play for a holistic global, continental, country-wide and enterprise-wide risk management. No company or individual worth its or his/her integrity and business acumen desires to get into financial embarrassment by failing to honour their financial obligations.
In the Zambia Daily Mail of Wednesday, August 16, 2017, BAZ was reported and quoted to be in agreement with the BFS Providers that commercial banks might take a cautious route in reducing interest rates due to the increased levels of non-performing loans that are beyond the acceptable industry threshold of 10 percent. They are in contention that banks have different balance sheets, cost structures and risk appetites which ultimately determine their acceptable interest margins.
I am in total agreement with the BAZ that there is 12.4 percent of the average bank loan book which is deviant or defiant but I seek their indulgence to state the root cause of NPLs. Is it only delays by Government to liquidate their indebtedness to contractors whose loans are linked to the banking system? Or the high and exorbitant lending rates are significantly contributing? I further seek from BAZ the make-up of the 12.4 percent: What are the loan weights in Kwacha and foreign currencies? As at June 30, 2017 based on the consolidated commercial banks data, the annual effective cost of borrowing denominated in local and foreign (dollar) currencies was 24.5 percent and 6.86 percent, respectively with the dollar interest rate parity translation to kwacha of 11.7 percent. This computation is based on the average Zambian inflation of 6.8 percent and the US inflation of 2.2 percent. At the break-even point, the Kwacha denominated lending rate is 10.7 percent compared to the interest margin inclusive rate of 24.5 percent. What economic fundamentals at play can justify this interest rates disparity risks?
This inequity in the cost of money amongst market players in our economy may be responsible for the undesirable 12.4 percent NPLs. Borrowers in the Zambian local currency cannot evenly compete with the borrowers in foreign currency and therefore may not generate sufficient revenues to meet their loan obligations. For the local currency denominated cost of borrowing computed as at June 30, 2017, it is the break-even interest rate, implying that it has taken into account the total direct and indirect variable and fixed operational costs. This evidence disputes the BAZ and BFS providers that commercial banks are taking into account their different balance sheets, cost structures, and risk appetites as factors of determining their interest margins which are high, exorbitant, exploitative, inequitable, and let alone not economically in equilibrium, thereby abetting arbitrage risks.
Let us address the interest rates-driven economic in-equilibrium in our country so that we achieve the National Financial Inclusion Strategy and the 7NDP objectives and goals. You can run and hide away from this economic in-equilibrium arbitrage risks but you cannot run and hide away from the effects of the truth and reality of the interest rates driven economic in-equilibrium which is being felt in the truly unacceptable NPLs exceeding the 10 percent industry threshold. Therefore, maintaining or delaying effecting the downward adjustments of interest rates will only exacerbate the economic arbitrage to the detriment of an all-inclusive national economic growth and development.
As intimated, a myriad of variables should be evaluated in arriving at the factual evidence of the causes of the unacceptable and uncollectible accounts by the BFS providers in my beloved country Zambia. And I contemplate variables such as: published economic indices, other parameters and data and expert evidence indicating a general country’s economic performance overall, sectorial, entity and at individual levels; and strategic, finance and information risk analyses correlated to the detailed analysis of NPLs. This risk analyses should comprise: industry, economy, competitor, interest and foreign exchange rates, capacity, collateral, concentration and default, settlement, commodity risks and last but not the least, the information operational pricing risk.
I therefore challenge and censure the BAZ and BFS providers that the obtaining high, exorbitant and exploitative commercial banks’ lending rates is not the panacea to the NPL that has exceeded the 10 percent industry threshold. I am available to demonstrate by way of computation to the public the economic equilibrium interest rates.
The author is a certified internal auditor.