By: Nghiinomenwa Erastus
Commercial banks must now implement a once-off collateral haircut of 30% on loans once they become non-performing.
The central bank has ordered the banks in its Determination on Policy Changes in Response to Economic and Financial Stability Challenges (BID-33) in October 2021.
The non-performing loans are facing repayment issues, with more than three months without an instalment made. Currently, these loans are standing at N$6,9 billion across the country.
These loans have been extended to households and businesses and have been more than three months since they have not paid a single cent on repayment of the principal amount loaned nor the interest they promised.
The bank explained that the collateral haircut would be maintained at 30% or increased due to the discounting of collateral over time using the IFRS 9 models.
This is “to ensure collateral values realistically reflect current collateral market values,” read the announcement.
A haircut, in this case, is not the barbers cutting borrowers’ hair but refers to the lower than the market value placed on an asset being used as collateral for a loan.
The percentage difference between an asset’s market value and the amount can be used as collateral for a loan.
A haircut can represent the potential loss of value in the collateralised asset due to various factors such as price volatility.
The central bank spokesperson Kaze the process mitigates against the loss of value to collateral for the duration the asset will remain on the books of the banking institution.
The aim is to ensure that the banking institutions make the necessary provision allocations for a non-performing loan and have a cushion against risk, therefore remaining financially stable.
According to the central bank statistics, commercial banks have extended loans and advances to half a million (570 211) clients valued at N$104,5 billion.
The households that have pledged/exposures for these loans are secured by residential mortgage property worth N$37,8 billion, while exposure to corporate lending is secured by commercial real estate worth N$14,2 billion.
The pledged assets are the one value that will be sliced, specifically those backing non-performing loans- according to the Determination as revised to perform collateral haircuts on loss category loan facilities.
Zenburuka explained that a pledged asset/collateral is the secondary source of repayment, and classification grades do not depend on the amount or quality of collateral pledged.
Therefore, collateral is only used in determining the amount of provision for loans graded substandard, doubtful, or loss that made up the non-performing categories and is deducted from the loan balance before applying the provisioning percentages.
This is especially true where the validity, value, and ability to realise collateral are questionable.
In the case of real property collateral, Zemburuka highlighted that the net realisable value might be deducted only if the transferability of title is certain and an active market for the property exists.
An ‘active market’ means that a willing buyer and willing seller exist, and a sale can be achieved within a reasonable period (not exceeding one year after judgment).
The haircut is only applied when a bank has obtained a judgment against a client and has a claim on the property when the client is non-performing on its repayment terms, Zemburuka added.
“In the ordinary course of business, it does not impact on the owners’ equity or wealth,” he said.
During the period reviewed, the banks have repossessed N$251,2 million worth of properties, vehicles, and equipment.
The International Monetary Fund insight on Sub-Saharan African Economic Outlook has highlighted that non-performing loans (NPLs) in sub-Saharan Africa are elevated, averaging about 8% of the total loan portfolio.
For countries where data are available, the average NPL ratio has increased modestly during the crisis from 6,6% at the end of 2019 to 7,7% as of March 2021- still below the 2018 levels.
The IMF, however, warned that these ratios might increase once regulatory forbearance and other exceptional support measures expire, which would severely limit the banking sector’s ability to provide new credit and support the economy.
Domestically, the Bank of Namibia has extended its relief measures till 2023 and has warned or restricted banks as a result of Covid-19 distress will not result in adverse classification at the initial extension of a loan moratorium for any allowable duration, of one to twenty-four months.
Should the moratorium, however, be rolled over based on prolonged distress, a loan should show increased credit risk once the cumulative moratorium amounts to 12 months.
Then such a loan will then be classified accordingly, explained the bank of Namibia.
The IMF cautioned that looking ahead; it will be necessary for banks and supervisors to have an accurate picture of the financial
system’s health, including adequate loan classification.
Furthermore, provisioning that reflects potential losses and a realistic projection of capital shortfalls and recapitalisation needs.
As economies recover and crisis-related measures are unwound, more targeted, and time-bound measures could be introduced to ensure the financial system’s health and stability and the private sector’s ability to support growth in the long term.