Prevailing economic pressure has rendered most commercial banks’ borrowers destitute, pushing them into defaulting on their loans, evidenced by a surge in the level of non-performing loans (NPLs) to above recommended regulatory ceiling.
The operating environment has remained volatile in the recent past, characterised by elevated headline inflation—seen at 28.4 percent—and high interest rates, making most borrowers struggle to service their loans.
In its June 2023 Financial Stability Report issued on Tuesday, financial services sector regulator, the Reserve Bank of Malawi (RBM), says most banks experienced an increase in NPLs during the month.
Figures provided show that the NPL increased to 6.9 percent in June 2023, deteriorating from 6.3 percent in December 2022. The rate remains above the 5.0 percent recommended regulatory ceiling.
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In absolute terms, the NPLs increased by 14.7 percent to K77.8 billion from the December 2022 position.
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“This was attributed to the deteriorating macroeconomic environment characterised by the rising inflation and interest rates; which affected borrowers’ capacity to service their loan obligations,” the RBM report reads.
It says in the second half of 2023, most banks anticipate defaults across economic agents to increase.
This is attributed to the banks’ expectations of continued depreciation of the local currency, further rise in inflation, rising interest rates, and consequential decline in disposable income.
In an interview Wednesday, Consumers Association of Malawi Executive Director John Kapito said most bank customers were desperate.
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“There is no activity on the market to guarantee wealth creation. Largely, the market is characterised by high inflation and high interest rates, which has affected consumers who in turn, are unable to service their loans,” Kapito said.
Meanwhile, RBM says, in the first half of 2023, a majority of banks experienced increased demand for credit across households, small and medium enterprises (SMEs) and large enterprises.
The increased credit demand was largely attributed to financing needs, particularly for commodity financing, rising consumption expenditure and working capital requirements.
“However, uptake for credit was slow for large enterprises, amid slowdown in business. This was attributed to the adverse macroeconomic environment, characterised by rising inflation and interest rates; acute foreign exchange shortage and fuel scarcity,” reads the report.
In terms of credit supply, most banks indicated to have maintained tight credit standards and conditions for approval of loans and credit lines to economic agents during the first half of 2023, 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.
