Banks cautious after mass dismissals
DOMESTIC banks have begun re-assessing their risk on personal loans after hundreds of jobs were lost following a Supreme Court ruling allowing employers to sack workers on notice.
This emerged as Reserve Bank of Zimbabwe (RBZ) governor John Mangudya said in a mid-term monetary policy statement released yesterday that the banking sector’s lending, which increased marginally from US$3,8 billion as at June 30, 2014 to US$4 billion as at June 30 2015, remained “largely skewed towards the individuals sector”.
Banking sector sources said there was a possibility many banks would incur losses from personal loans extended to individuals based on their incomes and employment.
An estimated 16 percent of loans in the banking sector are said to have been given to individuals.
Banks had generally rated permanent workers as low risk, and therefore highly favourable recipients of bank loans.
This was due to the fact that labour laws made it difficult and expensive for employers to fire workers, hence the relative stability and security of their employment contracts, both important factors considered by banks when lending to individuals.
As a result, bankers and other lenders have been providing workers with a variety of products, ranging from mortgages for the acquisition of real estate assets; finance for the purchase of motor vehicles and personal consumptive loans.
This was all based on their income levels and the security of their employment.
“With neither capital nor collateral security, bankers could trust employees with depositors’ money, and in return they would be rewarded with interest on loans, a major revenue driver in the financial institutions’ statements of comprehensive income,” said a banker, who declined to be named.
“The abrupt termination of contracts of employment en masse in the aftermath of the court ruling widely perceived as empowering the employers at the expense of the employees affects banks and other financial intermediaries in very serious ways,” the banker added.
He noted that some banks would go after those employees still at work who had signed surety forms on behalf of borrowing colleagues.
But there was also a possibility that both the surety and the borrowers lost their jobs in the current mass dismissals triggered by the Supreme Court judgment.
The banker said there was also the possibility that some bank could seek to salvage something from terminal benefits likely to be made to sacked workers.
But he remained cautious: “The circumstances surrounding the mass termination of employment contracts are characterised by illiquidity of businesses, hence the unlikelihood of terminal benefits beyond notice pay and cash in lieu of leave. Furthermore, the law restricts the amounts that may be deducted from an employee’s salary.”
Some banks have proactively sought to mitigate the effects of default risk by insuring personal loans against such risks as death, incapacitation and loss of employment.
In such cases, the terminations would not pose a serious threat to the lenders’ businesses as the lender only needs to prove that the debtor has lost their job to make a claim on the insurance.
Banks have contended with increasing non performing loans (NPLs) since dollarisation, with several having collapsed as a result of bad loans.
But Mangudya said, in his monetary policy statement, the banking sector’s aggregate ratio of NPLs to total loans had improved from a peak of 20,45 percent in June 2014 to 14,52 percent as at June 30 2015.
“Against a background of high levels of NPLs, and their economy-wide implications, the Reserve Bank has instituted holistic measures to resolve non-performing loans in the banking sector. In addition, banking institutions have instituted various measures to resolve the NPLs including the formation of dedicated loan recovery units, refining of credit underwriting standards as well as restructuring of some facilities,” said Mangudya.