By Hildebrand Shayo
Presently most bank’s quarterly audited financial reports indicates that these banks are experiencing high levels of non-performing loans (NPLs) ranging from four per cent to 50 per cent with averaged increase from 6.4 to 9.5 per cent when figures are placed in perspective.
Issues of NPLs and costs efficiency are related in several ways with general belief that failing banks tend to be located far from the best practice. While there is no suspicion on positive relationship between assets quality and costs efficiency that most of our banks are drawn in.
There are broad consensus on the view that high NPL levels ultimately have a negative impact on bank but as well as lending to the economy resulting to the balance sheet quality, profitability and capital restraints.
While in the contemporary years, studies on bank competence have taken in account asset quality specifically NPLs as a measure of bank’s performance, our bank’s current NPLs need decisive exit strategy from both a macro-prudential and a micro-prudential perspective.
Whereas isn’t about bank’s officers to go out “to collect” from those who have taken banks facility and have failed to meet their repayment commitment.
The omission to take on board business operating environment might lead to an erroneous banks measures as larger proportion of NPLs may signals that banks use fewer resources than usual in their credit evaluation and loan monitoring process.
The global lender is warning about soaring bad debts because although it may be contested, NPLs are hindrances to economic stability and growth of economies. Current measures taken by Central Bank of Tanzania of reducing statutory minimum reserves from 10 to 8 per cent is only a tip of the iceberg as more robust measures are required because the difference created is going to be of less value of the all-inclusive economy is stressed.
To promptly address the NPLs issues and hence cultivate a workable strategy that will address future similar problem, there is a need to place NPL’s in the business sector and those in the household sector.
In this way the ratio of NPLs to the total loans disbursed by the sector could help to designs appropriate strategy. Proposed approach is due to the fact that from the point of view of management accounting, bank asset quality and operating performance are certainly related.
Implication is that if a bank’s asset quality is insufficient i.e. amount becomes the amount to be collected, the bank will have no choice but to increase its bad debt losses as well as spend more resources on the collection of NPLs.
Naive of bank’s risks, knowledge gained from analysing published audited financial reports indicates that when banks list the loan amount for collection, banks will sustain extra operating costs from what can be termed as non-value-added activities to handle and supervise the collection process.
Non-value added undertakings may involve many hours of bank’s offices of constantly pursuing the debtors financial status, hours of being vigilant of the security value, dialogue and meetings on amortization plans, paying overheads for contract re-negotiation, calculating the costs to withhold, guarantee tracking and dispose of collateral at the time the loans become completely non-payable among other external variables outside bank’s control such as delays in court system, court injunctions and client’s character.
Furthermore, non-value added costs that goes unrecognised is winning the trust from possible lenders and public, preserving the banks from being rated poor as a consequences of external affairs, declining deposits due to a loss in credibility and extra banks resources to monitor loan quality.
Contained by this context, ignorance of the quality of the bank’s balance sheet may grab the attention of the business partners within and outside that may in turn deteriorates banks efficiency a situation captured by global lender as they warns about soaring bad debts.
Given banking industry business environment predominant in Tanzania today, bank loans will continue to be non-performing since glitches with perceived liquidity shortage purported to be caused by government withdraw of its deposits from commercial banks, commodity prices declines etc and the borrower’s financial health, problems with the design or implementation of lender protection features, or both.
In establishing how to deal with a problem loan, banks have tighten their credit terms as bad loans top 1.98tri/- in the stock of credit in the economy reaching 20.89tri/-. Notwithstanding the fact that lenders in the Tanzania financial landscape are stiffen terms of lending as one of the measures to deal with the escalation of NPLs, that has severely reduced the profits margins of many banks it is imperative from now on to distinguish between a borrower’s ability to pay and willingness to pay as opposed to rely on assets as collateral. Making this distinction is not at all times easy and requires effort.
Cautionary about soar-that turn into bad debt or dead loans will remains to be a problem for Tanzania banking industry and to some extent, this will be unavoidable. With industry’s amateurs diverse drivers for NPLs as a pretext, 59 Tanzanian banks in total, based on the first quota published audited financial reports give the impression that bank’s risk controls for loans are unsuccessful because the banks own a disproportionate levels of bad loans.
There is no one size fits all approach. Different banks pursue different strategies in relation to different types of loans. Strategic issues shaping approach in dealing with NPLs will include whether the loan can be rationalized, the quality of the principal collateral, proposed recovery levels, size of exposure, location of collateral etc.
One important thing is for banks, investors and borrowers to work together and be creative in finding solutions to the problems they collectively face to curb escalating NPLs.