A Bank of Uganda information office in Kampala. New Treasury rules will eliminate dormant accounts. PHOTO | FILE | NMG
More than
half of Uganda’s commercial banks would have collapsed if the Central
Bank had enforced a three-month customer loans repayments holiday at the
onset of the Covid-19 pandemic, the sector regulator has revealed.
A
stress test conducted on Uganda’s 25 banks showed most would not have
survived the cash crunch since loan interest income accounts for 60
percent of their revenue.
Results
of the stress test informed the decision to spread customer loan
restructuring over a 12-month period instead of offering an outright
repayment holiday, Bank of Uganda (BoU) said in a Zoom webinar.
“We
asked banks to suspend dividend payments this year so as to strengthen
their liquidity positions during the lockdown and also increase bad loan
provisions needed to absorb expected spikes in loan defaults. It is a
good idea to raise commercial banks’ paid up minimum capital in order to
improve the industry’s resilience during future crises but the timing
is not right. Banks are struggling with loan restructuring but if we
chose to increase all financial compliance ratios now, what would happen
to them?” posed Hannington Wasswa, BoU’s Director for Commercial
Banking.
Uganda announced a
strict lockdown of major sectors of the economy after Covid-19 positive
cases were reported in the capital in March. The economic shutdown hit
businesses hard, affecting borrowers’ ability to repay their loans.
An
estimated 15 banks would not have absorbed the revenue loss if the
90-day loan repayment break was granted to borrowers, people familiar
with the stress test said.
LOAN RESTRUCTURING
A
significant decline in the number of customers since onset of the
coronavirus pandemic in Uganda three months ago has also affected the
flow of bank deposits, a relatively cheap source of liquidity for the
lenders.
Uganda has an
estimated 4.5 million retail bank clients, many of which comprise
individuals holding multiple accounts. Small and Medium Enterprises
account for about 20-30 per cent of the Ugandan banking clientele pool,
according to past data published by Financial Sector Deepening Uganda
and other research institutions.
Uganda’s
National Social Security Fund (NSSF) says about 100,000 contributors
have dropped off its register since the beginning of the lockdown;
pointing to rising unemployment levels, reduced payroll tax collections
and potential loss of many salary deposit accounts held by commercial
banks.
NSSF Uganda has a membership of roughly 2.5 million contributors.
A
report by the Uganda Bankers Association (UBA) shows a total of 755,000
loan restructuring applications were filed by borrowers during the
lockdown, out of which about 750,000 were approved. The total value of
loan restructuring applications received by commercial banks amounted to
Ush2.8 trillion ($745 million) while the value of approved applications
grossed Ush2 trillion ($532 million).
The
trade and commerce sector accounted for a 24.7 per cent share of the
overall value of loan restructuring approvals followed by services
sector with 21.4 per cent while the agriculture sector accounted for
16.5 per cent. The real estate sector had a 16.03 per cent share while
the manufacturing sector and salary loans accounted for 9.5 per cent and
11.5 per cent respectively. The banking industry’s Non Performing Loan
ratio is projected to hit 15 per cent before end of this year.
Signs
of liquidity challenges facing Ugandan banks during the pandemic have
drawn attention to liquidity compliance ratios applied by the regulator.
MARKET CONSOLIDATION
The
minimum paid up capital requirement for Ugandan banks currently stands
at Ush25 billion ($6.7 million), while the minimum liquid assets to
total deposits ratio stands at 20 per cent. The average banking industry
liquid assets to total deposits ratio stood at 45.5 per cent at the end
of June 2019 compared with 46.6 per cent recorded in June 2018, as per
BoU data.
The minimum liquidity coverage ratio stands at 100 per cent, but averaged 211.4 per cent at the end of June 2019.
In
comparison, the minimum core capital to total risk weighted assets
ratio stands at 10 per cent, while the minimum total capital to total
risk weighted assets is set at 12 per cent.
The
regulatory ratios, which set a kind of buffer assets kept by a
commercial bank in proportion to the size of their balance sheets, are
intended to cushion the lenders in times of economic shocks.
Central
banks also adjust financial compliance ratios depending on the overall
economic situation or the need to sail through shocks such as the
Covid-19 pandemic.
The regulators could also order market consolidations to save struggling institutions.
“Some
commercial bank owners might struggle to raise additional capital to
meet new compliance requirements that may be set by the regulator.
Alternatively, some small banks could be advised to merge in an industry
that is economically sufficient for about 10 banks out of 25 players in
the market. The biggest industry concern right now is liquidity and the
Central Bank needs to provide more liquid cash to troubled banks in
order to keep them afloat instead of lending to certain bad borrowers
and eventually fail to recover it. Under a worst case scenario, some
affected banks ought to be stopped from carrying out lending business
altogether for some time so as to guarantee higher liquidity levels in
their operations and shield them from distress situations,” argued Dr
Fred Muhumuza, a director at Bank of Baroda Uganda.
A
senior Citibank Uganda executive said the pandemic has created a
situation where there is a disproportionately high number of commercial
banks chasing after a few, high-value clients.
“This
means a single, high value client is at liberty to choose which banks
to clear during the year. For example, one high value client might
receive loan offers from five banks but they might choose to clear loans
due to three banks and default on the remaining two loans. This means,
two commercial banks will lose money and will pass on the increased
credit risk to other borrowers. This partly explains why lending rates
in Uganda remain high despite aggressive policy actions. Through
consolidation, the banking industry’s resilience will eventually
increase and improve banks’ capacity to cope during crisis times such as
the coronavirus pandemic,” said the executive who requested anonymity.
No comments:
Post a Comment