2016: Bankers divided on impact of miserable year

One of the banks most hit was Crane Bank. In November, BoU took over the management of Crane Bank following fast deterioration of its operational capital to almost half of the minimum capital requirement of Shs 25 billion.

The BoU officials cited its NPLs, which had risen to more than 20% of the bank’s total loan portfolio posing a big risk to the entire performance of the sector and the economy in particular.

Mutebile said banks need to strengthen their credit management to mitigate credit risks. One of the areas which need to be addressed is that of currency mismatches, he said.

Foreign currency loans account for 43% of total bank loans, but the majority of borrowers operate businesses in the non-traded goods.  This means that even if borrowers of foreign currency loans which operate in non-traded sectors price their output in dollars, as many owners of commercial property do, they are still vulnerable to shifts in the real exchange rate, because their customers do not earn dollars.  The foreign exchange rate depreciation raises the real value of dollar denominated loan repayments but it does not enhance the capacity of nontraded goods businesses to earn more income. Mutebile said banks should restrict foreign exchange lending to companies which sell their output on the global market rather than the domestic economy, such as exporters.

In general, banks must be careful in evaluating the capacity of the prospective borrower to continue servicing a loan in the event of plausible shocks to revenue streams or debt servicing costs.

Mutebile also said he hopes that high operating costs for banks will gradually reduce to enable interest rates go down and ably manage stubborn NPLs.

BoU reports indicates that the annual operating costs as a percent of average bank assets are as still as high, or more than, 7% than they were 10 years ago.

As a percentage of their earning assets, reports indicate that the banks’ operating costs average nearly 11%.  As a result, these costs have to be recovered from the interest rate spread and noninterest income hence leading to higher interest rate spreads in the country averaging over 23% year-on-year.

Mutebile said, however, the central bank is encouraged that the high interest regime is cooling off and commercial banks are matching the declines in the policy rate. He said he was happy with the new credit approaches in the market, which he said were already yielding good returns.

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editor@independent.co.ug