Tanzania: Bank Of Tanzania Circular On NPLs

In this industry update, we provide an account of the Bank of Tanzania's (the BOT) Circular No.  FA.178/461/01/02 dated 19 February 2018 (the Circular) titled "Measures to Increase Credit to  Private Sector and Contain Non-Performing Loans".

The introduction of this Circular comes as a result of attempts to curb the general slow-down in  private sector credit growth and the increasing number of non-performing loans (NPLs). The aim of  this Circular is to provide guidance to banks and financial institutions on how to tackle the  rising number of NPLs through specific strategies that banks and financial institutions would have  to develop, as well as provide information on regulatory measures and reliefs that the banks and  financial institutions can apply to NPLs. There is also a quarterly reporting requirement that  banks and financial institutions will have to comply with. This report (format to be provided by  the BOT) will inform the BOT on the banks' and financial institutions' progress in reducing NPLs  and increasing good quality credit to the economy.

The banking industry benchmark for NPLs is set at 5 per cent, however, in the third quarter of  2017, unaudited accounts for 19 banks and financial institutions indicated that NPLs ranged between  4 per cent and 51 per cent, significantly higher than the benchmark.  A higher percentage of NPLs  means that banks and financial institutions make less profit because of the difficulties they have  in collecting interest and principal on the loans. This also results in banks and financial  institutions curtailing lending.

The BOT has recently revoked licences of several banks due to unsustainable NPL ratios while other  banks with high NPLs have been given a 6 month period within which to improve their credit-granting  processes.

Recommended strategies:

The BOT has recommended the following minimum strategies to limit NPLs:

a)   Reduce NPL ratio to no more than 5 per cent by setting strategic objectives with time limits;

b)   Set up a permanent recovery function with predefined roles and responsibilities;

c)   Separation of duties in the credit department with independent units performing credit  processing, sanctioning, monitoring, administration, and recovery and enforcement;

d)   Involve top management for high risk cases and some recovery decisions;

e)   Guidance and modalities for the following: i.      outsourcing of collection specialist ii.      management reporting iii.      regulatory reporting to BOT (new quarterly requirement) as well as a progress update  within 2 months of the Circular

f)    Establishment of options and key performance indicators to reduce and aid recovery of NPLs in  the short and long-term basis;

g)   Establish NPL policies including:

i.      Arrears Management Policy

ii.      Debt Recovery Policy

iii.      NPLs Classification and Provisioning Policy

iv.      Syndicated and Multi-Banked Distressed NPL Policy

v.      Collateral Management, Valuation and Reporting Policy

vi.     Early Warning Policy

h)   Reassess credit processes etc. to ensure lending takes place systematically, identify gaps and cure defects in internal processes. Regulatory measures and reliefs

The BOT has waived certain provisions of the Banking and Financial Institutions (Management of Risk  Assets) Regulations 2014 (the Banking MRA Regulations) in order to provide reliefs which hopefully  aid the reduction of NPLs in the industry. The reliefs are granted for a tenure of up to three  years up to 31 December 2020.

1.   Restructuring NPLs The BOT has now permitted banks to restructure NPLs up to 4 times. This is an increase from the  previous limit of 2 times which was in accordance with the Banking MRA Regulations. In order to  take advantage of this waiver, banks and financial institutions will have to demonstrate that  borrowers have a good track record of repayment but lack working capital to support their business,  only apply this measure for borrowers whose businesses have been affected by external factors as  opposed to their characters or overexposure, and maintain a list of NPLs restructured more than  twice.

It appears that the BOT requires banks and financial institutions to play a larger role by  identifying exactly why a borrower has failed to meet repayment deadlines. Moreover, the banks /  financial institutions will have to weed out borrowers who have a good repayment record but also  limited working capital which would be difficult to demonstrate in order to take advantage of this  waiver of Regulation 7 (5) of the Banking MRA Regulations.

2.   Waiver of interest and charges Banks and financial institutions may "roll-over, renew or extend overdraft facilities that have no  hard-core elements without considering the amount of interest and charges outstanding", since the  BOT has waived Regulation 7 (2) of the Banking MRA Regulations.

There are a number of conditions associated with taking advantage of this waiver including: a)   Application to borrowers whose overdraft facilities have been converted into term loans and  they have begun paying through repayment schedules; b)   NPLs are due to financial difficulties of a temporary nature and after a defined period the  borrower will be able to repay on the revised terms; c)   There is no other alternative apart from capitalisation of interest and charges is the only  available option; d)   This option will only be exercised to the same customer once; e)   Maintain records of credit facilities converted into term loans indicating amount of  capitalised interest and charges and the reasons for restructuring; and f)    Cannot be applied to NPLs under which there is litigation regarding recovery from collateral  or written-off loans.

Under this measure banks and financial institutions may establish their own percentages of arrears  to be capitalised as compared to the principal and interest.

3.   Upgrading of credit accommodation Banks and financial institutions may now upgrade term loans to a better classification category  once the borrower has paid two consecutive loan instalments as the BOT has waived compliance with  Regulation 7 (4) of the Banking MRA Regulations. Previously, under the Banking MRA Regulations,  banks and financial institutions could only upgrade term loans once four consecutive instalments had been paid.

4.   Withdrawal of write-off credit accommodation circular The BOT had issued Circular No. FA.56/470/01/VOLI/50 dated 10 April 2015 with the title "Charge Off  Credit Accommodations" which allowed banks and financial institutions to write-off credit  accommodation that remained in the loss category for more than twelve consecutive quarters. This  has now been withdrawn and compliance with Regulation 4 of the Banking MRA Regulations is required.  Regulation 4 of the Banking MRA Regulations states that "banks and financial institutions are  required to write-off credit accommodations (such as non-performing loans) and other risk assets  that have remained in the loss category for more than four consecutive quarters".

This will allow the number and ratio of NPLs to reduce significantly as many loans will now be  written off if they have not been paid back in a year or 4 consecutive quarters. The introduction of these measures will be useful in tackling the rising number of NPLs in the  industry as well as encouraging banks and financial institutions to be more diligent and proactive as they will have to abide by reporting requirements set by the BOT.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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