By Vince Musewe
It was Mark Twain who said “to have your facts first then, you can distort them as you wish! “
First of all, we need to understand the main purpose of Zimbabwe Asset Management Company (Zamco).
Zamco was established in 2014 by the Reserve Bank of Zimbabwe (RBZ) with technical assistance from the International Monetary Fund in order not only to address the emerging crisis in the banking sector related to non-performing loans (NPL), but also to ensure that Zamco would be established in accordance with international best practices.
The NPL ratio had then increased by 20.45%, which was well above the internationally acceptable threshold of 5%.
It is instructive to note that similar structures to deal with NPLs have been successfully put in place internationally, for example, in Nigeria, Malaysia, China, Indonesia, Thailand, Sweden, Ireland and the States. -United, among others.
When NPLs are too high, it poses a systemic risk to the banking sector and the economy as a whole as banks are unable to collect loans granted and strain their lending operations.
It is quickly becoming a serious risk factor for sustainability and access to credit for both banks and borrowers.
Therefore, high NPLs ultimately lead to a deterioration in the country’s credit rating, lack of access to lines of credit, and increased borrowing costs.
This further stifles trade and economic growth.
NPLs are non-performing loans granted by banks in the normal course of their operations and the collection of these loans has, for many reasons, become almost impossible (bad debts).
This would mean that assets (below the accounts receivable of banks’ balance sheets) become overvalued and therefore need to be adjusted accordingly to erase toxic debt.
Zamco then entered the scene and acquired the NPLs from banks on the basis of a willing buyer and a willing seller.
The banks themselves identified the NPLs, which dragged or messed up their balance sheets and carried risk, Zamco then ‘bought’ these assets for an agreed upon consideration normally less than the book value, which was then financed by treasury bills. at 10 to 16 years old.
Zamco acquired $ 1.13 billion in bad loans from banks.
For the avoidance of doubt, Zamco did not repurchase all the NPLs offered to it by the banks, but the NPL first had to meet defined criteria.
These include the safety of mortgage bonds, no insider lending and the underlying debtors must have recovery prospects.
After that due diligence, credit assessment, collateral assessment and loan pricing were performed.
Note that this loan acquisition process by Zamco had nothing to do with the borrower, it is an arrangement between the banks and Zamco.
It is the bank that owns the asset, i.e. the NPLs and therefore the decision to sell the NPLs to Zamco rests with the bank alone and not with the borrower.
It is also important to note that these loans were not written off or canceled, as those owed the banks still owe Zamco whose responsibility ultimately becomes to collect the loans. To achieve this, Zamco has several approaches.
Zamco, once it has taken over the loan, applies various resolution techniques to maximize the recovery of these loans.
This is when borrowers come in, or in other words, engagement with borrowers begins.
As part of the resolution of NPLs, Zamco helps these troubled companies with prospects for recovery by restructuring their debts, for example by reducing interest rates and extending the loan repayment period, thus reducing the interest charge. immediate business.
Other resolution methods include; conversion of debt into equity, swap of debt assets, negotiated settlement at a discount, schematics of arrangements to restructure loans, cession of NPL to investors, foreclosure by forced sale of collateral and liquidations, among others.
The point is, Zamco is pursuing what it considers to be the best but patient avenue to collect the debts owed.
The debts are neither canceled nor canceled as they are now with Zamco.
All other things failing, Zamco is left with the option of taking the necessary legal steps to recover the loans through foreclosures.
By law, Zamco is a Special Purpose Vehicle (SPV) with a specified shelf life of 10 years, which means that by 2025 Zamco will cease operations.
This procedure is common to all public management companies and aims to prevent moral hazard in the banking sector.
We are now four years away from the expiration of Zamco’s lifespan and it was recently announced that Zamco has now fully repaid the $ 1.2 billion loan it received from the government to acquire NPLs. from banks.
The latest banking statistics show that the ratio of non-performing loans to total loans remained low at 0.55% as of June 30, 2021.
Clearly, Zamco has fulfilled its mandate. I remember there was a lot of acrimony where it was claimed that Zamco was just there to forgive and pass bad debts of some politicians to the taxpayer.
The facts are that the NPLs were loans made by banks in the normal course of business and were not part of a grand plan by the RBZ or the government to write off the debts of some politicians.
It should be noted that a number of banks that closed during the period 2003-2005 were in part the result of high exposure to non-performing loans, especially insider loans.
By taking over the bad debts of the banking sector, Zamco thus prevented the calamity that occurred in 2003-2005 from recurring.
Compared to other countries, Zamco has clearly performed above average and can indeed be called a success.
It was Mark Twain who said “to have your facts first, then you can twist them as you like! “
- Vince Musewe is an independent economist and you can contact him at [email protected]
- These weekly articles are coordinated by Lovemore Kadenge, independent consultant, former president of the Zimbabwe Economics Society and former president of the Institute of Chartered Secretaries & Administrators in Zimbabwe. E-mail: [email protected] and mobile number +263 772 382 852