The National Bank of Rwanda (BNR) has directed commercial banks to revert to normal regulatory guidance in loan restructuring, classification and provision.

The outbreak of Covid-19 prompted policymakers to unleash a series of fiscal and monetary policy relief measures, including restructuring of loans for distressed borrowers in order to cushion Rwandans from the effects of the pandemic.

However, in a memo dated Nov.11, the central bank said that the period for allowing banks to restructure loans for borrowers hit by the COVID-19 pandemic ended in September 2021.

"The purpose of this letter is to remind you that the above relief measures expired and banks are required to continue managing restructured loans,” central bank Governor, John Rwangombwa, wrote in a memo addressed to chief executives of commercial banks.

It said the move was meant to avoid moral hazard related risks and install transparency in the balance sheets of banks.

In the memo, the central bank said that the decision was informed by its inspections as well as findings from various assessments on economic performance and recovery, especially of the sectors most affected by the pandemic.

"Banks should regularly assess all restructured loans including Covid-19 restructured loans that may be up to date or still under moratorium including those that accesses the Economic Recovery Fund,” it stated.

In case the borrower’s ability to service the account properly or may deteriorate because of current market conditions then such facilities should be classified at least in watch category, the Bank said.

"Banks should ensure that the above treatment of restructured loans are reflected in the financial statements for the period ending November 30, 2021 and onwards.”

Experts speak out

With the economy still reeling from the coronavirus effects, economists and industry experts have weighed in on the directive with mixed reactions.

According to Maurice Toroitich, the Chief Executive Officer at Bank Populaire du Rwanda (BPR), the decision demands banks to be more prudent in their lending practices.

Lenders, he said, will now be required to treat customers who benefited from the restructured loans and who have not been able to start repaying their loans as non-performing and make appropriate loan loss provisions.

"It just means that banks have to be more conservative in dealing with customers who have not yet started repaying their loans and make appropriate loan loss provisions while continuing to work with the affected customers to ensure full repayment of their loans,” he stated.

This year, Rwanda expects a strong economic rebound following the 2020 recession— the first in over two decades.

Real gross domestic product (GDP) is projected to grow above 6 per cent in 2021, from last year’s contraction of 3.4 per cent thanks to the national vaccination campaign that has allowed a gradual reopening of economic activity.

This has triggered a positive GDP outlook.  

"Given that the economy has generally opened and some businesses on track except in a few sectors like in hotels, I think it’s fair to say that if there is any business that has not yet started operating and started to repay their loans or is having trouble to repay their loans, then it can well be concluded that they have a fundamental business performance which banks have to recognise and deal with accordingly,” Toroitich said.

Angello Musinguzi, a Tax Expert at KPMG, argues that the decision will affect the cash flow of the loan holders

"Due to the Covid-19 impact, some sectors of the economy were more affected to the extent they may not recover fully in a year or two. Therefore, they become risky to lend to,” he says, urging government to consider additional relief measures for industries such as hospitality to enable them recover.

While the move is another proof of progress in recovery, he stressed that it could have been better to defer it for some months to enable businesses recover from the fangs of the pandemic.

Following global trends

Robin Bairstow, the Chief Executive of I&M Bank, said the central bank’s latest directive is in line with global trends where economies are being opened up in the wake of easing Covid-19 restrictions.

Bairstow, who also doubles as the Chairman of Rwanda Bankers Association (RBA), added: "We're in fact pretty comfortable with this position.”

He disclosed that banks no longer provide loan deferments as several businesses which were supported have already been impacted.

"I do not think that you can give loan deferments in perpetuity. At some stage reality has to bite and you have to start repaying your indebtedness,” he added.

Bankers say that impairments on the actual loan deferments have relatively been small in terms of the overall number of the deferments disbursed in the industry.

Bairstow pointed out that the volumes were high during the July, August, September and October period with the big report requests coming out of especially in the SME sector. "Now there's other measures that the banks have at their disposal. The second tranche of economic recovery, which I believe we are quite close to launching.”

For instance, at I&M has reduced interest rates to be able to ease borrowing for customers thanks to funding from Germany development lender KFW, which has helped provide grant facilities to more than 140 SMEs.

"We still have a long way to go in terms of exhausting, the grant facilities that we receive. So those have been the biggest impact,” Bairstow said.

Economists have urged the central bank to ease interest rates to stimulate more lending to the private sector.

Last week, the central bank retained the key repo rate, its benchmark lending rate, at 4.5 per cent, predicting that the financial sector would remain stable in the short and medium term.

"It (key repo rate) should be reduced to a lower rate so that commercial banks can also reduce their lending rates,” urged Claude Rusibana, a Lecturer of Economics at the University of Rwanda, stressing that there was a need to asses the movement of money between the borrower and lender.

However, the central bank predicts a positive economic outlook in the current year through to 2022, supported by high infrastructure project spending and a pickup in the manufacturing and service sectors.

Even as it warns of vulnerabilities related to credit risk, the Bank say that increased lending to the private sector is expected to continue supporting growth as local banks’ capital and liquidity levels remain sufficient.