The Zimbabwe Asset Management Company (ZAMCO), says it has managed to eliminate potentially hazardous systemic risk from the banking sector after taking over $1,1 billion worth of non-performing loans (NPLs), giving debt ridden firms a new slate to make a fresh start.
ZAMCO chief executive Cosmas Kanhai, said in an interview after it assumed bad debts, the NPLs rate among banks dropped from a peak of 20 percent to 5 percent, which is in line with the global trends.
Dr Kanhai said while ZAMCO’s primary function was to clean up the banks’ balance sheets to stem out the hazards associated with the bad loans, the lifting and restructuring of the NPLs gave firms that were struggling to repay latitude and time to get back on their feet. More than 65 percent of companies that had their bad loans assumed by ZAMCO from banks, had managed to pay up and were now in sound positions, Dr Kanhai pointed out.
In fact, Dr Kanhai said that ZAMCO was running ahead of schedule and could complete resolution of the NPLs much earlier than its gazetted 10 year lifespan. He said that the asset management firm will not exist in perpetuity and so will fold down after fulfilling its mission.
ZAMCO was established by the Reserve Bank of Zimbabwe (RBZ) in July 2014, as part of holistic measures to deal with the hazardous and systemic potential risk of rising (NPLs) in the banking sector.
The decision to form the debt assumption firm was in recognition that high NPLs invariably constrain banking institutions’ credit intermediation capacity thus, acting as a drag on economic growth.
Dr Kanhai said that ZAMCO was formed with the specific mandate to take over bad debts and prevent problems that could constrain the intermediation of banks, which has a serious negative effect on the economy.
“In terms of our core mandate, we have done very well because our mandate was to prevent banks from closing. So when we took over the NPLs, we cleaned up the balance sheets of banks.
“It means that banks no longer had non-performing assets, we also gave the banks Treasury Bills (TBs), as you are aware TBs are risk free asset, which means the capital adequacy ratio of banks improved.
“And from a liquidity side, they also had TBs, which they could use as security to access liquidity, so it helped the banks quite a lot. So in terms of the core mandate, ZAMCO achieved this very well,” he said.
Dr Kanhai said they are now working on the secondary phase of their mandate, which is to resolve and recover the NPLs from firms that owed banks.
Further, Dr Kanhai said ZAMCO was confident that it can pay off the $1,1 billion extended to it by Treasury (through TBs) to pay banks for the NPLs it assumed and the resources will come from repayments by firms that borrowed, proceeds of foreclosed NPLs with no prospect of turnaround and income from investments.
He pointed out that forming the asset management firms to clean up banks and prevent hazards of systemic risk was not peculiar to Zimbabwe, but that this is a global practice, which is also very common in Asia.
“If you have a systemic problem of NPLs, you can use the asset management firms to address that, that is what we did as Zimbabwe and we addressed NPLs ratio. It is not a Zimbabwean issue (taking over NPLs from banks), this is international best practice,” he said.
ZAMCO’s timely intervention came at a time banks were becoming extraordinarily cautious in their lending; only extending to high net-worth borrowers, which would negatively impact the economy.
“If you check now, since last year our NPLs ratio for the whole banking sector, it is trending below 5 percent, which is within the international best indicator because best practice says a bank should have (NPLs) 5 percent and below to be regarded safe and sound,” he said.
Dr Kanhai said since the NPLs accounted for just over 20 percent of total banking sector loans, before ZAMCO came in, the special purpose vehicle managed to reduce the ratio of NPLs by over 15 percent.
Many companies whose NPLs were taken over from banks, among them RioZim Limited, starafricacorporation and the Cotton Company of Zimbabwe (Cottco) are now performing exceptionally well.
“Those that have restructured (after NPLs takeover), most of them have paid off their debt, which means to us are now performing very well because if you pay off your debt, this means you have turned around,” he said.