eBusiness Weekly
Business Writers
While the Zimbabwe Asset Management Company (Zamco) has finished acquiring toxic loans from the financial services sector, risk remains abound.
Zamco has an obligation to meet periodic coupons, as well as redemption of Treasury Bills worth of close to $1 billion upon maturity. These TBs have been used as consideration in the acquisition of NPLs in the sector. This was noted in the company’s 2016 annual report for the period to December 31. Liquidity risk arises when the corporation fails to provide funding to meet these obligations as they fall due.
“The assets of the corporation (NPLs) bear very high credit risk such that expected periodic repayments may not materialise. Zamco sometimes grants repayment holidays upon restructuring of loans to give borrowers breathing space and offer opportunities for turnaround. As a result there will be a mismatch between cash inflows and cash outflows,” Zamco said.
There are a number of other challenges to befall Zamco. Given the high risk nature of the loan portfolio to start with, a multi-currency system exacerbates liquidity risk on domestic and foreign assets as ZAMCO does not have capacity to source local currency when required. This is further compounded by the fact that Zamco is undercapitalised.
“Government, through the ministry of finance, has pledged continued support to Zamco. The Government has started the process of taking over Zamco’s liabilities,” Zamco representatives shared, gasping for relief to what seems a dire circumstance.
However, some of the challenges at Zamco are not macro-economic, but internally conceived. Operational risk arising from failed or inadequate internal processes have been noted as harming the organisation. At the entity’s own admittance, the key to the operational risks would be enforcement of robust internal controls.
Zamco’s internal control system is based on a clear definition of responsibility and delegation of authority to a number of board committees. In terms of the aforementioned liquidity risks, Zamco assesses the probability of default of financial institutions or counterparties using internal rating scale tailored to the various categories of counterparties.
The rating scale has been developed internally and combines data analysis with credit officer judgment and is validated, where appropriate, by comparison with externally available information. Clients are further segmented into seven rating classes. To mitigate risk, Zamco held collateral worth $524 million at the end of 2016 on loans. Advances to its clients amounted to $699,3 million.
Collateral is mostly in the form of immovable property and other guarantees. The majority of the acquired loans were in the agricultural sector which constituted 44 percent of the portfolio, followed by manufacturing which comprised 13 percent of the acquired NPLs and financial services sector at 11 percent.
All this sounds technically comprehensive and representative of a well- structured entity, yet, execution of this due diligence has been deficient.
Zamco’s maximum exposure to credit added up to $784,5 million in 2016, up from $352,1 million prior year. That is an increase in exposure that has more than doubled in a single year! This is indicative of perilous practices that threaten the going concern of a publicly backed vehicle.
Zamco’s interest earning assets closed the year at $777,6 million. Financial liabilities on the other hand stood at $778,5 million up from $349 million in 2015. The financial liabilities for 2016 were made up of $299,5 million loans and borrowings, $449,7 million Treasury Bills in issue and $21,2 million in other loans and dues.
A more positive outlook has been portrayed by ZAMCO, saying a number of underlying borrowers (companies) have started benefiting or experiencing huge relief as a result of restructuring of their NPLs. The bad loans were short term with tenures of up to 3 years.
The initial interest rates offered during an era of rates as high as 35 percent per annum. For these companies, Zamco extended loan repayment periods up to 8 years and reduced interest rates to between 6 percent and 10 percent.
“These measures have resulted in the companies experiencing significant cash flow savings through reduction of finance charges. The cash flow savings are then channelled towards operations, providing the companies opportunities to return to viability. In this regard, Zamco has assisted in the preservation and creation of employment in the country through resuscitation of distressed companies,” Zamco said.
But analysts and stakeholders privy to the mismanagement of operations at ZAMCO have wondered, to what cost should misfortune borrowers be given relief when ZAMCO carries its work with weak internal controls? ZAMCO is purported to be an entity to encourage an overall principle of responsible practices in lending. That principle is not exemplified in the bad management of ZAMCO itself.
Zamco is a Special Purpose Vehicle, which was set up by the Reserve Bank of Zimbabwe in 2014. At the time of formation of Zamco NPLs in the banking sector had risen to very high levels, with the NPL ratio peaking at 20,45 percent as at 30 September 2014.
NPLs in the banking sector have further reduced from 12,17% as at 31 December 2015 to 7, 88 percent as at 31 December 2016, but remain higher than the recommended 5percent
