NPLs rampant in recession

Anticipating borrowers’ inability to service their loans in a Covid economy, the BoN increased its NPL trigger for banks from 4% to 6%.

30 April 2020 | Economics

Banks are facing severe financial headwinds in 2020 on account of the coronavirus outbreak. – Bank of Namibia

Jo-Maré Duddy – Non-performing loans at local commercial banks totalled more than N$4.99 billion at the end of last year, nearly N$3.8 billion or 312% more than 2016, Namibia’s first recession year in the current cycle.

Total loans and advances to the private sector – business and individuals – increased by nearly 21% or N$18 billion over the same period.

Total write-offs grew from N$70.4 million in 2016 to N$109.2 million at the end of 2019, while total provisions rose from N$929 million to N$2.1 billion over the same period.

The worrying tendency is evident in the Bank of Namibia’s (BoN) latest Financial Stability Report, released on Tuesday.

Despite the deterioration in banks’ asset quality last year, the Namibian financial system remained sound and stable in 2019, the BoN says.

Compared to 2018, risks to Namibia’s financial stability have “increased significantly” as a result of the economic contraction experienced in 2019, the central bank says.

“However, since the outbreak of Covid-19 in January 2020, sentiment became gloomy,” it adds.

“The pandemic-related risks which have subsequently stepped to the fore are of a more serious and immediate concern, requiring the full focus and determination of banks and regulators in order to manage the situation,” the BoN says.


Since 2017, non-performing loans (NPLs) have been rising in line with sluggish economic growth, the BoN says.

NPLs refer to loans that are more than 90 days overdue.

“Between 2011 and 2015, the average NPL ratio stood at 1.5% of total loans, while real GDP [gross domestic product] grew on average by 5.6% during the same period.

“Real GDP began to contract in 2016 and continued to deteriorate further, shrinking by -1.1% during 2019. During that time, the NPL ratio more than doubled from 1.5% in 2016 to 4.8% at the end of 2019,” the BoN says.

In contrast, the NPL ratio stood at 3.2% in the second quarter of 2008, at the peak of the global financial crisis, the report states.


With NPLs representing 4.8% of total loans and advances, banks last year breached the BoN’s threshold of 4%.

“The 4%-benchmark is an internal trigger set by the management of the Bank of Namibia to indicate when the BoN should engage formally with the banks regarding their asset management strategy.”

The central bank has engaged with the individual banks to discuss their strategies to manage the growing NPLs, the BoN says.

“Moreover, BoN will continue to monitor the effectiveness of these plans and take corrective action if needed. Going forward, BoN will continue to monitor the industry’s NPLs and take necessary measures,” it says.

“Despite increasing significantly, BoN would like to assure the public that NPLs are currently not a threat to financial stability because the banks are able to adequately manage the associated credit risk.

“Moreover, BoN has increased the internal NPL trigger during crisis times to 6%,” the report states.

The central bank says the rising NPLs were expected “considering the rapid deterioration of GDP during the same period”.

“Moreover, NPLs were more volatile (i.e. increased rapidly) following the onset of the economic recession, as depicted by the standard deviation of the NPL ratio which increased to 1.0% between 2016 and 2019 from 0.2% between 2012 and 2015,” the report states.

“Despite the NPL ratio increasing, it should be noted that it is a lagged indicator, with some of the loans feeding into it having the ability to still be rehabilitated and migrate from non-performing to performing status,” the BoN points out.


According to the BoN, the increase in NPLs “were observed across the industry, on all loan products, in all sectors, implying that the issue was systemic”.

Mortgage NPLs shot up by 62.5% compared to 2018. This is expected given that mortgage loans make up 51.3% of the total loan book of banks, the BoN says.

NPLs in other credit categories increased year-on-year as follow: Overdrafts (22.9%), personal loans (29.4%), credit card advances (39.5%), and other loans and advances (17.3%).

“The growth in the NPL ratio of this magnitude is reflective of recessionary economic conditions. Current economic conditions played a rather large role in the ability of clients to service their debt, more so with lay-offs and retrenchments experienced,” the BoN says.

Enough money

Despite the recession, banks continued to be profitable in 2019, realising total after-tax profits of N$2.7 billion – up 5.9% from 2018.

“Income growth remained positive with both net interest income and other operating income contributing positively to the growth in total income. Net interest income increased from N$3.1 billion in 2018 to N$3.3 billion in 2019, while other operating income increased from N$930.0 million in 2018 to N$970.6 million during the period under review,” the BoN says.

The central bank requires banks to keep liquid assets of 10% of total average liabilities to the public. The sector last year continued to hold liquid assets well in excess of the statutory minimum liquid assets requirement, the BoN says.


“Banks are facing severe financial headwinds in 2020 on account of the coronavirus outbreak and associated disruption of income-generating activities and cash flows,” the report states.

“The servicing of debt by borrowers generally depends on their sustained engagement in income-generating activities. Due to the travel bans, lockdowns and other measures introduced to slow the spread of the virus, numerous businesses have closed or scaled down their activities or face sharply lower prices for their products, resulting in a loss of income and an inability to service their debt. Employees of such businesses face similar setbacks.”

The BoN therefore expects a “sharp escalation of NPLs among borrowers who used to be in good standing, servicing their debt regularly and posing normal risks”.

The central bank will scrutinise NPL developments closely, “particularly in an attempt to distinguish between those arising from normal economic risks and those that have been brought about by the Covid-19 pandemic”.

“Measures such as special repayment holidays, loan write off extensions, government assistance programmes etc. are expected to mitigate against an accelerated increase in NPLs due to the Covid-19 pandemic,” the BoN says.

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