THE Zimbabwe Asset Management Corporation (Zamco) has taken over US$812 million toxic debts from struggling companies in order to help them regain their footing.
The window for qualifying companies to offload their debts is however set to close in March.
Zamco is a special purpose vehicle that was created by the Reserve Bank of Zimbabwe (RBZ) in July 2014 to contain both the financial and economic risks associated with high non-performing loans (NPLs).
Some of the companies that have been relieved so far include RioZim (US$34 million), Starafricacorporation (US$32 million), Cottco US$30 million, Agribank (US$17 million), Hwange Colliery Company Limited (US$15 million), Metbank (US$14 million), NMBZ (US$11,6 million), Cairns (US$7 million), Border Timbers (US$6,6 million), the Cold Storage Commission (US$2,1 million) and Global Horizons (US$1 million).
Though the facility was initially tailored for banks, its scope was broadened to cover companies whose operations could be boosted by hiving off souring debts.
But from April, Zamco, which has since engaged the services of advisory firms, will shift its mandate from acquiring new debts to resolving and disposing them to interested investors.
Mr Edwin Shangu from Zamco told The Sunday Mail Business last week that 13 local and international firms have been roped in to help liquidate the debts.
“To date, a total of 13 institutions have been accredited. These are DBF Capital Partners, Cosmos Capital, NMT Capital, Corporate Excellence, TN Financial Services, Bethel Equities, Riscura Zimbabwe, CBZ Asset Management, Brainworks Capital, Purpose Vunani Asset Management, Jaltech Consulting, Ernst & Young and Deloitee & Touche.
“NMT Capital and Jaltech Consulting are foreign-based institutions. As previously highlighted, the major focus of Zamco to date has been to acquire eligible non-performing loans from banks.
“The acquisition process is critical in cleaning up the balance sheets of banks so that they are able to focus on their financial intermediation role, which is important for economic growth. Once the acquisition phase is completed (which we expect to end by 31 March 2017), the focus will shift to resolution and recovery of NPLs and one of the resolution options that will be pursued by Zamco is to be able to sale some of the NPLs to interested investors,” said Mr Shangu.
Most local companies were, and still are, exposed to expensive credit from banks as most of the deposit stock that is available for lending is short-term.
International credit has also been unreasonably high owing to the country’s risk premium and perceived uncreditworthiness.
Though the key rate of the Federal Reserve Bank of the United States of America — the principal issuing authority of the US dollar — stands at between 0,5 percent and 0,7 percent, local banks are lending from between 12 percent and 18 percent.
On February 15, the RBZ capped interest rates at 12 percent per annum.
Experts say high interest rates are one of the reasons accounting for high default rates on loan repayments and, by consequence, the high rate of NPLs.
Notably, NPLs peaked to 20,5 percent in 2015, which is markedly more than the internationally accepted level of five percent.
However, as risk-averse banks cut back on lending with guidance from the RBZ, NPLs have since dropped to 7,9 percent as at December 31, 2016.
Industry believes interest rates ranging between 35 percent and 40 percent that were levied by banks post-2009 led most companies down a very slippery slope.
It even becomes more difficult for companies to service their debts in an environment where consumer demand began to soften as liquidity challenges began to set in.
Presently, banks prefer lending to individuals than companies.
Statistics from the central bank indicate that credit growth — a measure of loans and advances by financial institutions — fell to US$3,7 billion in 2016 from US$3,9 billion a year earlier.
Declining lending activity by banks has progressively led to a corresponding increase in deposits, from US$5,9 billion in December 2015 to US$6,5 billion last year.
But the bulk of deposits, or 54,6 percent, are transitory or short-term.
Bank profits have been increasing as a result.
Aggregate net profit for the sector rose 42,4 percent to US$181,1 million in the year ending December 31, 2016 from the same period a year earlier.
However, market watchers say profits are mainly being driven by non-core activities such as high service charges.
Real Time Gross Settlement (RTGS) fees, for example, are pegged at US$5 million, which is largely considered as extortionate in a cash-starved environment.
“Bank must re-orient lending”
Despite the tight economic environment, industry and monetary authorities believe there is still scope to extend loans to the productive sectors of the economy.
It is envisaged that supporting companies, particularly exporters, will help stimulate economic growth.
Continued concentration of bank loans on consumptive entities is viewed as one of the key structural weaknesses of the local economy.
Last year, individual loans accounted for almost 28,8 percent; agriculture (16,7 percent); distribution (15,4 percent); services (14,9 percent); manufacturing (10,4 percent); mining (4,8 percent); construction (3,5 percent); financial firms (2,1 percent); transport (1,6 percent); and communications (1,6 percent).
RBZ Governor Dr John Mangudya recently raised concern over the fact that banks are not supporting companies in both manufacturing and mining.
“Banking sector funding to productive sectors of the economy such as mining and manufacturing continues to be constrained by the short-term liability structures of banking institutions’ balance sheets.
“The sectorial distribution of credit underscores the need for banking institutions to continue to re-orient their lending towards productive and export sectors of the economy,” said Dr Mangudya on February 15.
Statutory Instrument 64 of 2016 — which restricts the importation of goods that can ordinarily be produced on the local market — and optimism surrounding the 2016/ 2017 agricultural season, are making industry bullish about the prospects of an economic rebound.
Last week, Confederation of Zimbabwe Industries (CZI) vice president Mr Sifelani Jabangwe said it is important for banks to abandon their “overly cautious” approach to lending.
“Banks are now doing prudential lending (because of high loan defaults but) the economy thrives when it is being serviced by banks and in this case, if banks support the productive sectors of the economy, then there is more economic activity.
“With SI 64 of 2016, banks are guaranteed to get their money back when they lend to the manufacturing sector. We urge banks to partner industry for economic growth,” said Mr Jabangwe.
He added that while prudential lending is good for banks to remain viable through minimising risk, failure to capitalise companies “leads to the shrinking of the cake” where banks end up battling to service a few consumers.
Zimbabwe National Chamber of Commerce (ZNCC) president Mr Davison Norupiri suggested past experiences have spooked banks from committing to long-term financing of the manufacturing sector.
“I think banks no longer have confidence in business due to the fact that they have lost money in the last five years or so and would not want to lose more money.
“They seem to want to spread the risk because if you extend, for example, US$20 million to one company, the risk would be bigger in the event of failure to repay,” said Mr Norupiri.
However, he noted that banks have to bite to bullet.
Bankers Association of Zimbabwe president Mrs Charity Jinya said the mismatch between the current short-term nature of deposits and medium to long-term funding needs of some productive sectors of the economy is making it increasingly difficult for banks to extend credit.
“The banking sector funding to the productive sectors of the economy, such as mining and manufacturing, continues to be constrained by the short term and transitory nature of banking sector deposits.
“The mining sector which largely requires medium to long term funding is better supported from offshore lines of credit.
“Banks cannot on-lend short-term deposits for very long periods without creating unsustainable asset or liability mismatches on banking institutions’ balance sheets.
“Access to long term capital for these sectors hinges on the ongoing ease of doing business reforms which are expected to make the country attractive for appropriately priced offshore facilities,” she said.
Sources say concerns over policy inconsistency and low capacity in the manufacturing sector dominated discussions at an informal meeting between industry and banks sometime last year.
“For example, banks cited the recent reversal of Statutory Instrument 20 of 2017, imagine someone had borrowed money to invest in meat products and bought them at a higher price.
“In no time, the policy (SI 20) is reversed and you have to sell your products at a higher price — the company will definitely be unable to repay,” said a source that attended the meeting.
SI 20 introduced a 15 percent value-added tax (VAT) on meat products, cereals and other basic commodities.
Companies are however, trying to improvise.
It is understood some companies are even cutting deals with foreign suppliers who are able to apply for credit on their behalf.
Such bridging facilities, which are usually used to procure raw materials, are considered favourable as they attract interest rates of five percent over 120 days.