In this industry update, we provide an account of the Bank of Tanzania's (the BOT) Circular No. FA.178/461/01/02 dated 19 February 2018 (the Circular) titled "Measures to Increase Credit to Private Sector and Contain Non-Performing Loans".
The introduction of this Circular comes as a result of attempts to curb the general slow-down in private sector credit growth and the increasing number of non-performing loans (NPLs). The aim of this Circular is to provide guidance to banks and financial institutions on how to tackle the rising number of NPLs through specific strategies that banks and financial institutions would have to develop, as well as provide information on regulatory measures and reliefs that the banks and financial institutions can apply to NPLs. There is also a quarterly reporting requirement that banks and financial institutions will have to comply with. This report (format to be provided by the BOT) will inform the BOT on the banks' and financial institutions’ progress in reducing NPLs and increasing good quality credit to the economy.
The banking industry benchmark for NPLs is set at 5 per cent, however, in the third quarter of 2017, unaudited accounts for 19 banks and financial institutions indicated that NPLs ranged between 4 per cent and 51 per cent, significantly higher than the benchmark. A higher percentage of NPLs means that banks and financial institutions make less profit because of the difficulties they have in collecting interest and principal on the loans. This also results in banks and financial institutions curtailing lending.
The BOT has recently revoked licences of several banks due to unsustainable NPL ratios while other banks with high NPLs have been given a 6 month period within which to improve their credit-granting processes.
a) Reduce NPL ratio to no more than 5 per cent by setting strategic objectives with time limits;
b) Set up a permanent recovery function with predefined roles and responsibilities;
c) Separation of duties in the credit department with independent units performing credit processing, sanctioning, monitoring, administration, and recovery and enforcement;
d) Involve top management for high risk cases and some recovery decisions;
e) Guidance and modalities for the following:
i. outsourcing of collection specialist ii. management reporting iii. regulatory reporting to BOT (new quarterly requirement) as well as a progress update within 2 months of the Circular
f) Establishment of options and key performance indicators to reduce and aid recovery of NPLs in the short and long-term basis;
g) Establish NPL policies including:
i. Arrears Management Policy ii. Debt Recovery Policy iii. NPLs Classification and Provisioning Policy iv. Syndicated and Multi-Banked Distressed NPL Policy v. Collateral Management, Valuation and Reporting Policy vi. Early Warning Policy
h) Reassess credit processes etc. to ensure lending takes place systematically, identify gaps and cure defects in internal processes.
Regulatory measures and reliefs
The BOT has waived certain provisions of the Banking and Financial Institutions (Management of Risk Assets) Regulations 2014 (the Banking MRA Regulations) in order to provide reliefs which hopefully aid the reduction of NPLs in the industry. The reliefs are granted for a tenure of up to three years up to 31 December 2020.
The BOT has now permitted banks to restructure NPLs up to 4 times. This is an increase from the previous limit of 2 times which was in accordance with the Banking MRA Regulations. In order to take advantage of this waiver, banks and financial institutions will have to demonstrate that borrowers have a good track record of repayment but lack working capital to support their business, only apply this measure for borrowers whose businesses have been affected by external factors as opposed to their characters or overexposure, and maintain a list of NPLs restructured more than twice.
It appears that the BOT requires banks and financial institutions to play a larger role by identifying exactly why a borrower has failed to meet repayment deadlines. Moreover, the banks / financial institutions will have to weed out borrowers who have a good repayment record but also limited working capital which would be difficult to demonstrate in order to take advantage of this waiver of Regulation 7 (5) of the Banking MRA Regulations.
Waiver of interest and charges
Banks and financial institutions may “roll-over, renew or extend overdraft facilities that have no hard-core elements without considering the amount of interest and charges outstanding”, since the BOT has waived Regulation 7 (2) of the Banking MRA Regulations.
There are a number of conditions associated with taking advantage of this waiver including:
- Application to borrowers whose overdraft facilities have been converted into term loans and they have begun paying through repayment schedules;
- NPLs are due to financial difficulties of a temporary nature and after a defined period the borrower will be able to repay on the revised terms;
- There is no other alternative apart from capitalisation of interest and charges is the only available option;
- This option will only be exercised to the same customer once;
- Maintain records of credit facilities converted into term loans indicating amount of capitalised interest and charges and the reasons for restructuring; and
- Cannot be applied to NPLs under which there is litigation regarding recovery from collateral or written-off loans.
Under this measure banks and financial institutions may establish their own percentages of arrears to be capitalised as compared to the principal and interest.
Upgrading of credit accommodation
Banks and financial institutions may now upgrade term loans to a better classification category once the borrower has paid two consecutive loan instalments as the BOT has waived compliance with Regulation 7 (4) of the Banking MRA Regulations. Previously, under the Banking MRA Regulations, banks and financial institutions could only upgrade term loans once four consecutive instalments had been paid.
Withdrawal of write-off credit accommodation circular
The BOT had issued Circular No. FA.56/470/01/VOLI/50 dated 10 April 2015 with the title "Charge Off Credit Accommodations" which allowed banks and financial institutions to write-off credit accommodation that remained in the loss category for more than twelve consecutive quarters. This has now been withdrawn and compliance with Regulation 4 of the Banking MRA Regulations is required. Regulation 4 of the Banking MRA Regulations states that “banks and financial institutions are required to write-off credit accommodations (such as non-performing loans) and other risk assets that have remained in the loss category for more than four consecutive quarters”.