The Sunday Mail
Business Reporter
Government’s decision to cap loans that banks can extend to insiders and related parties is expected to enhance financial stability, corporate governance and protect depositors’ hard-earned money, Deposit Protection Corporation (DPC) chief executive officer Mr Vusi Vuma has said.
Some financial institutions went bust as a direct result of major shareholders and senior executives recommending huge loans to friends, relatives and firms where they had a stake without due diligence and proper risk assessment.
The DPC, whose mandate is to minimise risk and protect depositors in the event of bank failure, actively participates in the resolution of collapsing or collapsed member institutions and liquidation of closed banks.
As reported last week by our sister paper, Business Weekly, Government has moved in to restrict the amount of loans banks can extend to insiders and their business connections.
“The Deposit Protection Corporation welcomes the Banking (Amendment) Regulations, 2020 (No. 5) Statutory Instrument (SI) 265 of 2020, which in our view would help to enhance financial stability and corporate governance,” said Mr Vuma.
In an emailed response to The Sunday Mail Business, Mr Vuma said SI 265 of 2020 represents a codification of banking regulations on prudential requirements already in force through various Reserve Bank of Zimbabwe (RBZ) monetary policy statements, as well as SI 177 of 2010, No. 3 of 2010; and SI 137 of 2020, No. 4 of 2020.
Through Statutory Instrument 265 of 2020 — Banking (Amendment) Regulations, 2020 (No. 5) — Government has set limits on the amount of loans to be extended.
“It is hereby notified that the Minister of Finance and Economic Development has, in terms of Section 81 of the Banking Act (Chapter 22:24) and in consultation with the Reserve Bank of Zimbabwe as required by subsection (5) of that section, made the following regulations:
“(2) In addition to the requirement set out in Section 35 of the Act, no banking institution shall knowingly extend any loan or advance to or for the benefit of any insider or any close relative or related interest of such insider if the aggregate of the new loan or advance added to the total of any other loans or advances given to the insider and any of the close relatives of the insider will exceed 10 per centum of the institution’s paid-up equity capital,” reads part of SI 265 of 2020.
According to the new amendment, if the aggregate of all loans, advances or extensions of credit, including any proposed new extension of credit, to all insiders and their related interests or close relatives, exceeds 10 percent of the banking institution’s paid-up equity capital then they must not be given a new loan.
Loans to insiders can only be extended if they are at the same terms, including eligibility, interest rates and collateral, as those prevailing at the time for comparable transactions by the banking institution with other persons that are not insiders.
Insiders and related parties must be denied access to new loans if any other loan extended to them is non-performing.
For the purposes of Section 35 (3) of the Banking Act, the maximum amount of credit that can be granted to an insider without the conditions under Section 35 (3)(a) to (d) shall be $50 000 or 1 percent of the institution’s minimum capital, whichever is the lower.
“No banking institution shall extend loans or advances amounting to more than 10 percent of its minimum capital to or for the benefit of any partnership of which one or more insiders or any close relative or related interest of such insiders are partners,” adds SI 265 of 2020.
In addition, the total amount of credit extended by a banking institution to a partnership shall be deemed to be extended to any member of the partnership.
“Every banking institution shall at the end of each quarter, submit a report on its insider loans in the manner and form as may be directed by the Registrar.”
The amended regulations now require that on appointment and annually thereafter, every director of a banking institution or a controlling company shall deliver to the chief executive officer of the institution or company, in Form DI, a disclosure of interests.
The toxic insider loans have for long been a major concern for the banking sector.
In 2016, the DPC dragged the now-defunct Interfin Bank’s majority shareholder, Mr Farai Rwodzi, to the High Court seeking to recover over US$136 million as compensation for prejudice caused by his alleged negligence.
In the summons issued against Mr Rwodzi, the DPC said the accused used his influence as the shareholder to acquire loans, which he used to service personal debts and for entities in which he had a direct or indirect interest, while at the same time prejudicing the bank of US$136 097 897.
“On diverse occasions, first defendant (Rwodzi) wrongfully and unlawfully or fraudulently utilised his influence as a controlling shareholder in the bank and caused the board of directors of the bank and/or the employees of the bank to grant loans to companies or entities in which first defendant had a direct or indirect interest in circumstances where no proper security was granted or pledged,” DPC said in its founding affidavit.
Another bank, Capital Bank, closed after it emerged top shareholders of its holding company borrowed millions of dollars in depositors’ funds in breach of banking regulations.
In 2015, The Sunday Mail reported that central to the outflow of cash to top shareholders at Capital Bank was Mr Patterson Timba, who was the largest shareholder and effective controlling shareholder in Renaissance Financial Holdings, which owned 100 percent of Renaissance Merchant Bank.
Investigations by the RBZ found that he and close colleagues borrowed millions of dollars through loan schemes unsanctioned by normal banking systems.
The unsanctioned loans to directors left the bank with a capital deficit of US$16,6 million and in need of a capital injection of US$31 million to restore the capital base to required levels at that time.
The RBZ probe established that besides taking the lion’s share of the bank’s loans, Mr Timba obtained loans or funds from other financial institutions on the back of money market deposits placed by Renaissance.
SI 265 of 2020 will work alongside other measures put in place to prevent abuse of depositors’ funds by bank shareholders and depositors. The maximum shareholding of corporate entities other than financial institutions has been increased from 10 percent to 25 percent — the same as individual shareholders. The amendment recognises that corporate entities ordinarily have more financial resources than individual shareholders.
To enhance corporate governance and risk management practices, heads of the compliance function, internal audit and the company secretarial services have been designated for fitness and probity assessment by the RBZ. Every director of a banking institution or a controlling company shall deliver to the chief executive officer of the institution or company a disclosure of interests in a prescribed format on appointment and annually thereafter.
Capital requirements for Tier I banking institutions whose operations include core banking and other activities is set at the Zimbabwe dollar equivalent of US$30 million, while Tier II banking institutions limited to core activities is set at the equivalent of US$20 million by December 31, 2021.
