When we suffer from any kind of sickness, we prefer doctors to cure our ailment and not just the symptoms.
We should probably demand the same from our economic policy-makers.
The analogy serves to explain my scepticism towards the relevance of establishing the Zimbabwe Asset Management Company (Zamco).
Zamco was formed to acquire non-performing loans (NPLs) from banks; the purpose supposedly being to help increase liquidity and loan availability in the economy.
Now, if that is the reason of the existence of Zamco, we should not expect any greater contribution to the economy beyond that. If Zamco is given the required amount of cash to buy up a significant portion of NPLs across banks, then indeed it will remove these bad debts off the banks’ balance sheets and have them looking healthy with new cash on hand. In so doing, Zamco achieves its aforementioned purpose.
Still, that at best cures our symptoms of economic distress, far from solving the ailment.
Cognisant of such a shortcoming, we must ask ourselves, is it worth the resources to establish Zamco?
Zamco proponents will tell you high levels of NPLs pose a systemic risk to our banking system and will further sell you on the threat of a possible spill-over effect on the entire economy.
They must relax from the panic.
Such concerns carry an incorrect interpretation of Zamco’s effectiveness in solving those issues.
First, non-performing loans are a result of more effecting macro-economic problems.
Consumers are spending less due to lower salaries and increased unemployment.
This depresses businesses’ financial returns and solvency.
Our local industry is largely uncompetitive as shown by the current account deficit, implying that businesses cannot be as productive with loans.
These are just a few factors that are causing high rates of NPLs.
They are beyond Zamco’s influence.
Simply buying up NPLs and giving money to banks does not create a better environment to reduce loans from defaulting.
Within the scope of the Reserve Bank of Zimbabwe’s responsibilities, perhaps greater effort could have been focused towards monetary policies that reduce the occurrence of these bad debts.
Maybe interest rates are too high with some companies facing costs of up to 20 percent.
It could be that credit terms force mismatches between loan conditions and the business cycles of borrowers.
For instance, mining enterprises are being forced to deal with 90-day loans when their operations and processes have cycles that extend well over 18 months before receiving any cash-flows.
Obviously such incongruence creates high defaults.
Also, it could be that banks have poor internal controls to manage credit risk when making these loans.
Focused perusal into such monetary details would be more effective for the RBZ in trying to reduce NPLs.
Second, the resources to operate Zamco are not financially justifiable.
Beyond the costs of forming the company and setting up for operations, Zamco will also spend a significant amount in buying the NPLs.
After acquiring these loans, Zamco will have to design models on how to make the loans perform or create ownership rights in the assets involved. It will have to work very flexibly with each and every borrower of these bad debts on loan modification or re-financing programmes.
This is all very costly.
Two concerns here; this is a big bet that defaulting borrowers will be able to work their way out of their debt and Zamco will profitably recoup these loans.
Also, if the RBZ is willing to spend money creating an institution to work on loan modifications and refinancing strategies to create profitable loans, why not spend much less on a regulatory programme that enhances our banks’ capability on those competencies?
Insisting on Zamco is like the regulator paying to do what it is supposed to be regulating.
If Zamco does not intend to hold on to these NPLs, then it will be forced to look at selling them.
Some proponents of the company have tried to justify its existence by raising comparisons with other countries that have followed a similar programme.
It would be helpful to get a better grasp of NPLs in global finance.
In global markets, many banks are indeed selling NPLs to investors.
When these banks want to get rid of their NPLs, they will package up a large pool of NPLs and sell them off to the highest bidder. There is a market for NPLS; it is actually a desired product that potential buyers bid for.
However, this is all in very different economic conditions than our own.
No one is bidding for our NPLs; understandably so.
What are the prospects of recouping these loans, let alone making them profitable?
Even selling the assets put up as collateral would be unprofitable at this time.
Assets in the country are falling in value.
Contrary to what seems to be popular belief, many publicly-developed asset management companies (AMCs)actually fail. This is largely due to a lack of development of a market for NPLs. We do not have such a market and are ill-positioned to create one at the moment.
One way of looking at it is, if we cannot attract investment for equity and Foreign Direct Investment, how can we be optimistic about attracting investors for our bad debts?
This is the reason I say Zamco is very premature.
For an economy that is still on the decline, there are no signs of co-ordinated policy that would make our AMC successful in selling NPLs to foreign investors.
Hence, the costs of initiating Zamco are not financially justifiable because there are no prospects of recovering the funds committed to it.
I am not convinced that Zamco is worth the bill. It will be only as effective as healing the symptoms by increasing liquidity in the short-term.
In the long-term, it will not solve the problem of high NPLs in the banking system and it will not recover the exorbitant funds that it will extract from the RBZ.
I give it a nay.
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