Tough times ahead: Non performing Loans hit Ugx. 1.8 trillion

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By Moses Kaketo

The number of local businesses men and businesses going through financial distress is on the rise. This has seen commercial banks report more Non performing Loans.

Sources at Bank of Uganda (BoU) reveal the Nonperforming Loans (NPL) have hit Ugx. 1.8 trillion, up from Ugx. 573 billion at the end of 2015.

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Available data reveal the Commercial banks worst hit by NPL include: Stanbic Bank, Standard Chartered, Barclays, Crane Bank, Dfcu and Orient Bank.

Reliable sources reveal the NPL for one of the said commercial banks have reached an all time high of 25 percent. The normal and acceptable rate is 3 percent.

Last year, BoU conducted on-site examinations on commercial banks, while the banks were adequately capitalized; the report notes that with regard to credit risk, most banks’ credit portfolios were highly concentrated among the top 20 borrowers in each bank, with some borrowers having loans in more than two banks.

Investigations by Newz Post further reveal in some banks, three borrowers form the bank’s largest loan portfolio. And these are the ones failing to service their loans.

The top businesses under distress include a leading telecom company, two top manufacturing companies, a construction company, a transport firm and a host of local city tycoons and entrepreneurs.

A source close to the ‘distressed’ tycoons told Newz Post that if nothing is done, we may see these individuals walking naked on the streets of Kampala or committing suicide.-The the situation is that bad.

Also read: Top Ugandan entrepreneur goes bankrupt, selling all his assets

The source described the situation as ‘‘Tough’’ He explains that what is going on in Uganda’s banking sector and economy at large, is the worst he has ever seen since he returned to Uganda 20 years ago.

The banks are said to be in a dilemma. On one hand, the clients are failing to service their loans, it is also difficult to get serious buyer for the clients’ properties to recover their money.

The BoU carried out a stress test at the end of 2015. The analysis of default by the banks’ three largest borrowers and an increase in NPLs by 200 percent revealed large potential losses. It showed that if each bank’s three largest borrowers were to default, with a loan loss of 100 percent, 17 banks would become under-capitalized with an aggregate capital shortfall of Ugx. 595.4 billion.

In meeting held recently between Bank of Uganda, Ministry of Finance, Private Sector Foundation, KACITA and the other organizations representing business community in Uganda, the BoU reportedly refused to honour pleas from the private sector to rescue distressed businesses.

The meeting was met to among others, discuss the possibility of BoU extending the delinquency period and government repaying all the loans owed by the businesses.

A source who was part of the meeting told Newz Post that BoU officials refused to honour these proposals.

Also read: BoU threaten to close a top commercial bank

According to BoU guidelines, any loan that goes beyond three months without servicing is regarded as NPL and the affected commercial bank is supposed to provide for it.

On the proposal to take over NPL’s, BoU reportedly asked the businessmen to sell off their assets to repay their

Two city tycoons reportedly told the meeting that they have nothing to sell.

‘‘I have sold all I can sell, but still have a lot to settle. The remaining assets are mortgaged’’ A seasoned entrepreneur who is almost going bankrupt told the meeting.

A real estate developer with huge establishments along Entebbe road told the meeting that all his assets are mortgaged; as such he has nothing to sell to settle his outstanding loans which are way above Ugx. 30billion.

Sources within BoU are wondering the criteria the bank would use to help the distressed individuals and businesses. The problem is said to be cutting across: Small, medium and large companies.

Also read: The Untold story of Mutebile’s returns as Governor Bank of Uganda

Analysts say, helping the collapsing businesses would set a bad precedent.

While helping the manufacturing companies is understandable (they borrowed for production and indeed the stock is there. However, there are no buyers) consumer demand is said to be at its lowest.

Person taking a penny from wallet - Bankruptcy

On the contrary, some tycoons have no explanation on the where about of the money they borrowed.

The BoU now wants commercial banks to provide for the NPL’s or else they will close any bank that fails to follow the bank’s regulations.

Providing for bad loans means the shareholders of the affected banks have to inject in more capital to cover up the loans.

According to BoU 2015 annual supervision report, total shareholders’ equity of banking system grew from Ugx. 3.2 trillion to 3.5 trillion in 2015.

How banks got into the current crisis

Statistics from BoU reveal the annual credit growth, increased from Ugx. 9.4 trillion in 2014 to 10.8 trillion in 2015.

Sources say businesses anticipated turmoil in 2016 general elections. As such, they borrowed heavily to take on projects before the elections. However, the economy was not that good and thus they were unable to repay the loans.

Stiff competition among commercial banks saw some banks buy off loans from rivals, which have since turned into NPLs. This explains why some banks are safe from NPL.

It is also true that some tycoons connived with asset valuers to overstate the value of their assets. For example, an asset worth Ugx. 5 bn would be valued at Ugx. 9bn. It said the tycoons then deliberately fail to repay the loans. They then go through other people to repose the assets at cheaper prices.

2015 annual Supervision report, BoU warned that a rapid rise in property and land prices could lead to build-up of risks if lenders and borrowers speculate on prices going up for example by extending mortgages at high loan to value Ratio’s.

True to this, the real estate sector is said to be undergoing a recess. No wonder, loans to real estate tycoons form a sizeable part of NPL.

Government is partly to blame for this crisis. For example, government owes a leading construction company up to Ugx. 50bn. The firm is said to have borrowed from a commercial bank. While the company finished the work, the government is yet to pay.

The best approach to rescue the economy

Analysts say, the best approach is for government to set up a Reconstruction Company or a Trust to take care of all the NPL’s. The Trust would be in charge of collecting anything they can from the distressed companies and individuals. Government can then come up at a later date to top up the balance.

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