Banks now between a rock and hard place

I recently read Central Bank’s concerns in regard to non-performing loans (NPLs) in this paper on 28th September 2017. According to the piece, the Governor John Rwangombwa when delivering the quarterly financial stability report, indicated that NPLs increased from 8.1 per cent to 8.2 per cent as of period ended June 2017. This did not trigger much until I read another article entitled “Banks face lower returns with new rule on bad loan” in one of the regional papers where the author wrote about new the International Financial Reporting Standards (IFRS9) that requires financial institutions to provide provisions of 100 per cent for the loans borrowed. This requirement is an industry ‘game changer’, in my view and I am certain that banks, their partners and shareholders understand the effects of these regulations and these new reporting standards. However my greatest worry is that borrowers and other related institutions that are para judicial and judicial might not be aware of this fundamental change and its effects. It is high time borrowers understood that their banking experience has changed and there will be harsh effects and reasons should be understood. I will attempt to provide an explanation in simple terms. Initially, Banks used to provide provision for bad loans after having calculated the total value of the secured collaterals by subtracting the total loan facilities given out and the balance could be the one provided for the provisions. Basically banks had a room of using securities to cover them up and provide quite relatively small provisions. However the rules and regulations (under the new IFRS9) have changed and they are clear that each disbursed loan facility by a bank has to be provided for by a provision of the same amount of 100 per cent. Therefore, the provisioning goes beyond the normal loans that is to say overdrafts, asset financing, mortgages and this extends to different bank guarantees such as bid bond, performance, and advance. In other countries within the region even off- balance sheet facilities like letters of credit are provisioned which normally fall under the trade finance, the trade finance facilities were normally considered as less risky and provisioning of these facilities was a not given too much attention. Under the same new rules, even loans offered to governments are required to be provided for by the same provisions, initially these kind of loans were considered as risk free but due to the current historical trends at the global arena where even sovereign states defaulting, the new regulation (IFRS9) requires to provide provisions for the loans given to governments. Ever since the enactment of these regulations , lenders have been put between a rock and hard place visa vis its borrowers hence making the lending business relatively inflexible for startup businesses and to some risky sectors such as Agriculture, tourism and mining, where investors are unable to provide securities. Borrowers in the aforementioned sectors and others with the similar challenge should understand that lenders are required to take provisions of equal amount at 100 per cent and that why banks have started to be stricter during due diligence in order to comply with these reporting standards. Currently banks will require borrowers to provide securities at a discounted value during the loan processes. I often see borrowers disgruntled when banks request for securities even when payment ability is evident even when their securities have been discounted at 50 per cent or 70 per cent based on locations. Borrowers need to understand why banks are doing all this, it is because banks are not ready to burn their figures over defaulters who will affect their bottom line by providing provisions. Considering the growing trend of defaulters of non-secured loans especially the salaried borrowers in the market, I am worried that banks shall have to make tough decisions to avoid having to provide for unsecured loans sooner than later. Even for the secured loans, banks are yet to be aggressive after lending to their clients, before the provisioning requirements, banks were reluctant to enforce forceful recovery, however due to this requirements, the recovering process whether soft or hard “auctioning, leasing and possession” of the defaulters property is going to be expedited like never before and clients’ properties shall have to be sold in order for banks to reduce how much they provision for NPLs and stuck up loans.. For the judicial organs and Para judicial institutions like the office of the Registrar General at Rwanda Development Board (RDB), work is going to multiply. Isah Byarugaba is a seasoned Banker with expertise in Legal, Debt and Recovery. Views, opinion, commentary pieces expressed in this article are those of the author and do not necessarily represent those of the New Times Publications.

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Banks now between a rock and hard place