Non-performing loans (NPLs) to total loans ratio surged to 6.3 percent as at end December 2022 from 4.5 percent during the preceding year, posing a greater risk to the banking sector.
This is according to a Reserve Bank of Malawi (RBM) 2022 Financial Institutions Annual Report released Monday.
Largely, prevailing economic pressure rendered most commercial banks’ borrowers destitute, pushing them into defaulting on their loans, pushing the NPLs rate to above recommended regulatory ceiling.
The operating environment has remained volatile during the year under review, characterised by elevated headline inflation and high interest rates, making most borrowers struggle to service their loans.
According to the central bank report, although the banking sector closed the year adequately capitalised, profitable and liquid, asset quality deteriorated following downgrades of facilities by banks and NPLs to total loans ratio at 6.3 percent, above the recommended prudential benchmark of 5.0 percent.
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“High sectoral concentration of loans remained a supervisory concern with four sectors accounting for 75.9 percent of the loan book. Total assets increased by 24.1 percent to K3.6 trillion largely due to growth in investments and securities and loans.
“Similarly, total liabilities increased due to growth in deposits and liabilities to other banks. Deposits remained the major source of funding,” the report reads.
Financial market analyst Bond Mtembezeka said the increase poses a risk to the banking sector as it means the performance of their loan book is being affected.
“What is critical is to watch this ratio because its growth poses a serious risk as the banks are highly leveraged institutions,” Mtembezeka said.
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Economist from Malawi University of Business and Applied Sciences Betchani Tchereni attributed the situation to volatility of the economy.
He said, in 2022, more people lost jobs as the country was recovering from pangs of the Covid pandemic.
“This year, borrowing has been made expensive, which means not many people will borrow and, hence, we might see that figure dropping not because all is well but because people are afraid of loans,” Tchereni said.
According to latest figures, the private sector indebtedness to the banking sector is currently at K1.1 trillion.
Lately, most commercial banks maintained tight credit standards and conditions for approval of loans and credit lines to economic agents, both for short term and long-term loans.
The tightening position points to risk aversion, amid a persistently deteriorating macroeconomic environment.
Most banks expect to further tighten their credit standards and conditions in the second half of 2023, as they envisage a continued deterioration in the macroeconomic environment.
Looking ahead, RBM says it will continue to closely monitor trends in systemic risk and seek to ensure that the financial system is prepared for, and resilient to, the wide range of risks in the face of uncertain projections.
