BoU responds on banks’ rise in non-performing assets

By Julius Businge

Bank of Uganda has responded to the rise in banks’ non-performing loans and other assets (NPAs) recorded in 2012 arguing that the rise was mainly attributed to the macroeconomic challenges in 2012.

The bank however, in an email to this magazine was quick to say that the industry Non-Performing Assets average remained within acceptable levels. It said the current NPAs/Total Advances ratio as at March 31, 2013 was 4.66% slightly higher than the 4.23% recorded at the end of December 2012.

The bank said it is important that the non-performing assets are kept low in order to ensure a healthy banking sector because higher rates imply increased provisions for loan losses that impacts on earnings and capital of banks. It added that higher rates create risk premiums that can translate to higher lending rates.

Lower rates on the other hand encourage credit growth and lead to a healthy banking sector. The bank said the Financial Sector in Uganda is liberalized and the Bank of Uganda (BoU) has not imposed credit controls.

However, it said, each bank is required to have in place a credit policy and procedures manual to guide lending operations.

“BoU has regulations on insider lending, single borrowers’ limit and credit classification and provisioning,” the Bank said, adding that the bank monitors compliance with the regulations through periodic reports submitted by banks and on-site examinations.

Going forward, the bank said the NPAs are expected to fall in future “this is because the underlying factors that led to the higher NPAs levels in the first place have been reversed”.

“The inflation rates are now back to normal and are expected to remain stable within the BOU targeted rate of 5% in the medium term,” the Bank said.