Is the banking sector really safe and sound?
http://www.theindependent.co.zw/
Thursday, 02 February 2012 16:44
By Linda Tsarwe
IT took a lot of effort to attract deposits back into the system after
dollarisation. Coming from a background where most people had lost their
savings in the banks due to hyperinflation, no one was willing to go through
the same predicament again, especially with US dollars. As at November 2011,
the banking sector had deposits amounting to US$3.3 billion, having grown
from as low as US$1.4 billion at the end of 2009, signalling that confidence
is slowly being restored. In turn, due to an increase in the deposit base,
most banks resumed their lending activities which had been put on hold. By
December 2011, the average loan to deposit ratio, including offshore lines
of credit, was over 87%. Local banks have notably been the most aggressive
when it comes to lending, while the international banks have been more
prudent.
Although deposits have grown over the years, the hot nature of these
deposits has not really changed. As at November 2011, demand deposits
accounted for 89.3% of total deposits, which limits long term lending. As
such some banks managed to secure offshore lines of credit which are
relatively cheaper and longer term. These have not been sufficient to cater
for the funding needs of the whole country. One therefore wonders how these
local institutions have managed to be so aggressive in lending. It is quite
likely that these banks have a huge funding gap due to the mismatch of
assets and liabilities on their balance sheets.
However, the core problem that has developed out of this aggressive lending
is that of the high default rate. It was inevitable, considering that credit
was available at every corner though not at the right price. If one has an
active credit account at a furniture retailer, one with a clothing retailer
and a loan at the bank; considering the levels of incomes that an average
consumer is getting, then there is a strong chance that the consumer is
over-borrowed. And now it seems like the bubble is about to burst as the
brunt of over-borrowing is catching up with many.
It is reported that most corporates are failing to repay the funds they
borrowed and are rolling over these facilities. Not surprising, since most
companies had to recapitalise after dollarization and the only option was
through debt as cheaper routes like rights issues failed to get support from
shareholders. This has resulted in huge finance charges.
Loan loss provisions by banks have not portrayed a true picture of the
events on the ground. The Ministry of Finance together the Reserve Bank have
been quoted reassuring the public that the banking sector is safe. At a
press conference held last week, the Minister alluded to the liquidity
challenges in the economy as attributable to expenditure pressures during
the festive season, which was characterised by ‘high volumes of high value
transactions’. This argument seems somewhat disingenuous. If an account is
adequately funded then why should the bank fail to honour its obligation?
At the CZI seminar and in the monetary policy statement, the RBZ governor
further reassured the public that the banking sector was safe, citing that
the bulk of the assets and deposits were in the hands of the ‘strongest’
banks. It, however, raises the question of which banks are being defined as
the strongest? The papers were full of reports of ‘perceived’ strong banks
that were failing to make payments to clients.
Although opinions differ on how financial authorities should handle a
possible liquidity crisis, not acknowledging the problem is surely not the
solution. It is apparent that most banks are failing to honour their
obligations. Solutions such as staggering high value payments do nothing but
make banking less flexible. According to the monetary policy statement
presented by the RBZ governor on Tuesday, cash withdrawals now require a
notice period, the length of the notice period being dependent on the amount
involved. Only funds that amount to US$10 000 or less can be withdrawn on
demand. So much for the convenience of banking! It would also be a hard call
to convince the unbanked to trust the banks. No one needs a restrictive
condition attached to their hard earned cash.
Essentially, we have gone back to a similar Zimbabwe dollar scenario of cash
rationing. Such a move is in huge contrast to the claims that both the
Governor and the Minister have been making about the banks being safe and
sound. In fact, this only heightens the fears that the liquidity crisis
could be worse than we think.
To ease the liquidity crunch, the Minister highlighted at the press
conference that US$120 million would be availed to the RBZ for the purpose
of carrying out its lender of last resort function in addition to the US$7
million announced in the budget. Further, the RBZ Governor mentioned in the
monetary policy statement that a further US$80 million accessed from Afrexim
bank would also be channelled towards the same purpose. A total amount of
only about 6% of total deposits! And obviously insufficient.
Can the RBZ really be relied upon to utilise these funds correctly after its
history with the statutory reserves and the FCAs of gold producers? Both the
Minister and the RBZ are now talking about issuing tradable paper backed by
statutory reserves that most likely do not even exist. Essentially, it means
the paper is worthless. The RBZ failed to honour the gold bonds created for
gold producers at maturity. Will the tradable paper for statutory reserves
be any different?
Instead of all this going back and forth, which does nothing but destroy the
confidence that has been painstakingly built up in the banking sector, some
hard decisions are required. Controlling banking by limiting transactions
does not work and has proved to not work elsewhere in the world. It actually
makes the situation worse by creating speculative opportunities.
International banks that have been blamed for not aggressively lending will
have the last laugh. Aggressive lending in this volatile environment just
does not cut it.
All the signs seem to indicate that the credit bubble must eventually burst
despite assurances by the authorities. Whether the authorities will
eventually admit it or not is another issue. Only time will tell how events
will pan out. But as indicated in the monetary policy statement, we should
brace ourselves for the worst.