BANK of Tanzania has slashed by 2.0per cent statutory minimum reserves (SMR) requirement for deposit taking banks, giving them ample space to extend credit to private sector.
“The Bank has reviewed the statutory minimum reserves requirement on the domestic and foreign currency deposit liabilities of the non-central government...,” Prof Ndulu said. In May 2015, central bank raised MRS from 8.0 per cent to 10 per cent to tackle shilling volatility that depreciated to 2,050/-.
The move later enabled to stabilise the shilling. The decision came barely a week after ‘Daily News’ published a story of credit growth slowing down on the back of increasing non-performing loans.
The situation came at a time the market experienced a tight liquidity which undermined the ability of the banks to lend and might elevate potential risks on growth targets.
BoT data showed that credit to the private sector experienced slowest growth of 7.2 per cent last year compared to growth of 24.8 per cent in 2015 and 19.5 per cent in 2014. The credit to private sector rose marginally to 16.6tri/- in 2016 up from 15.49tri in 2015 in what indicates low increase in major economic activities.
The Governor said all these measures aim at providing liquidity to banks which will in turn expand their lending base and contribute to the growth of credit to the private sector.
“It is expected that banks will use the additional liquidity to extend more credit to the private sector at reasonable interest rates that will support various activities in the economy and hence contribute to growth,” Prof Ndulu said.
According to the law banks maintain minimum cash balances with the BoT as reserves against the deposit and other liabilities of the banks and financial institutions. Statutory minimum reserves requirement are legal balances which banks are required to keep with the central bank, determined as a percentage of their total deposit liabilities and funds borrowed from the general public.
The NPLs climbed to four year high after reaching 9.5 per cent last year.
In 2015 the rate was 7.8 per cent. The country benchmark is 5.0 per cent. The tight liquidity situation, particularly in the first three months of 2016/17, was also mirrored in the general rise of the rate at which banks lend cash to each other overnight to an average of about 16.15 per cent in September 2016 from 12.76 percent in June 2016. To arrest the situation BoT cut discount rate early this month to 14 per cent from 16 per cent, a move designed to loosen tight liquidity.
At the end of last year, commercial banks were holding a whooping 1.3tri/- of non-per-forming loans in the last quarter of 2016, an amount equivalent to 4.5 per cent of the total budget for the 2016/17 financial year. The amount, which underscore the challenge of rising default risks by borrowers due to tight liquidity, is above total revenue collection by Tanzania Revenue Authority for January this year which reached 1.14tri/-.
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