Local banks are facing the risk of non performing loans despite the ongoing rebound of the economy.
The gradual reopening of the economy supported by a relatively successful vaccination campaign by the government is fueling growth, raising optimism that the economy is likely to expand above the initial projection of 5.1 percent this year.
However, there is concern that some sectors of the economy including hotel and tourism hard hit by the pandemic are yet to recover, and as a result businesses are struggling to meet their loan obligations.
According to the latest Monetary Policy & Financial Stability statement released on November 11 by the National Bank OF Rwanda, the financial sector is expected to remain sound and stable with financial institutions able to absorb losses that may arise from problem assets associated with the pandemic.
However, the pandemic and required containment measures reduced incomes of households and businesses, weakening debt service capacity, and increasing credit risk.
Sectors of the economy that remain stressed despite the ongoing recovery are commercial real estate, hospitality, tourism and manufacturing.
Loans awarded to hotels are top on the list on the ‘watch category’ by banks, indicating that the risk of default is high as the repayment is late by 30 to 90 days.
Central Bank officials say the hotel and tourism sector value chain has been adversely affected.
Non- performing loans ratio in banks slightly reduced from 5.2 percent in September 2020 and 5.7 percent in June 2021 to 5.1 percent September 2021.
According to the central Bank, the reduction was mainly induced by write off of long outstanding non-performing loans as well as the growth in gross loans.
However, risks continued to build up as loans in the watch category increased by close to 70 percent year on year to Rwf476 billion in September 2021, and represented 14 percent of total loans up from about 10 percent in September 2020.
“In a bid to avoid moral hazard related risks and instill balance sheet transparency, the credit restructuring forbearance granted to banks in June 2020 in response to the pandemic expired in September 2021. Banks are required to revert to normal regulatory guidance in loan restructuring, classification and provisioning…” the central bank said.