The Reserve Bank of Zimbabwe has directed banks to relax credit granting requirements as it moves to provide credit support to firms that have been hit by the coronavirus pandemic and the subsequent national economic lockdown.
The Covid-19 pandemic and the subsequent national lockdown undermined the viability of business concerns and naturally banks are likely to show reluctance to offer loan facilities.
Even before the coronavirus pandemic, banks were not so keen to offer credit to business concerns as reflected in the 2019 loan to deposit ratio of just 36,6 percent against an international benchmark of approximately 70 percent.
The RBZ attributed the subdued 2019 loan to deposit ratio to “cautious lending approach adopted by some banking institutions.”
But with the damage to economic activity caused by the Covid-19 pandemic, which left some businesses without income, banks are now likely to show even more reluctance to offer loan facilities.
According to economist John Robertson, some firms, will struggle to support loan application as the flow of income might not keep pace with debt repayment.
The tourism sector for example, which is expected to require loans for working capital support, will not see an uptick on revenue for a little longer.
Government anticipates a consequent fall in tourism business, with the country set to lose between US$500 million to US$1,1 billion in potential tourism revenue in 2020 from the projected revenue of US$1,4 billion.
Under such scenarios, Robertson is of the opinion that only firms that can support loan applications by showing good reasons for confidence that income flows will keep pace with debt repayment commitments, will be able to overcome the anxiety of lenders.
“But, with purchasing power falling and strong evidence that shrinking production volumes will cause price instability, banks everywhere are becoming increasingly cautious about offering overdraft facilities, particularly while deteriorating market conditions seem very likely to upset sales forecasts,” he said.
Central Banks steps in
The central bank has, however, sought to step in and has asked banks to relax some of their credit granting requirements.
Appearing before the Budget and Finance Parliamentary Committee RBZ governor Dr John Mangudya said the central bank had asked banks to relax their single borrower limits.
A single borrower limit is a legal lending limit which a bank can lend to a single borrower or per customer. Before the new measures, the single borrower limit, was 25 percent but has now been relaxed to 35 percent of net capital base per bank, according to Dr Mangudya.
“We have also asked banks to look at their credit risk structuring because of Covid-19, some of their customers will not be able to pay on time because they had no revenue and sales.”
Listed entity First Capital Bank has already indicated that clients constituting 6,5 percent of the loan book, including tourism sector, have requested for restructuring of their loan facilities and repayments.
Dr Mangudya said banks needed to look at the performance of their customers and give grace periods and moratorium for paying their facilities.
He said banks will have to conduct loan classifications and provide provisions for their customers that are not able to pay.
He, however, emphasised that such relaxed terms should not be extended to wilful defaulters but only to those who are of good risk.
The central bank has also asked banks to defer payment of dividends during this period unless they can prove otherwise the need to pay.
Reporting requirements for banks and the financial services sector have also been relaxed, said Dr Mangudya.