Covid-19 Takes Toll On Lenders

THE global Covid-19 pandemic took a toll on the micro-finance sector in the first half of the year with the portfolio quality deteriorating sharply to 19,5% from 13,3%, although risk mitigation measures are being put in place.

The most common indicator to describe portfolio quality is the ratio of non-performing loans (NPLs) to total outstanding loans.

In international practice, non-performance typically means that a loan is overdue for more than 90 days. However, in some countries, a shorter delay of more than 30 days or more than 60 days is also defined as non-performance.

The loan portfolio at risk is defined as the value of the outstanding balance of all loans in arrears (principal) generally expressed as a percentage rate of the total loan portfolio currently outstanding.

An H1 report by the Zimbabwe Association of Micro-finance Institutions (Zamfi) shows a weak and deteriorating portfolio quality PAR> 30 days against international benchmarks of 5%, while the risk coverage ratio was also weak having closed the period at 31,54% against international benchmarks of between 80% to 100%.

However, where it is read in tandem with the Monetary Policy Statement, Zamfi said some of the indicators were very close. For instance, under the current period under review, it announced a PAR< 30 days at 19,50% whilst the RBZ records stood at 16,97%. The difference just lies in the practitioners submitting data and total convergence attained at the time. A survey on the impact of Covid-19 on the sector conducted by Zamfi shows that the majority of micro-finance institutions (MFIs) were already implementing risk mitigation and survival strategies for their respective micro-finance business which included adopting digitalisation of operations, especially in accepting online loan applications to avoid human contact with clients. Other measures included a more stringent assessment of clients before loan approval, closure of some branches to cut on cost as well as staff retrenchments. Reducing loan tenure to manage repayment risk, reducing lending and only focusing on disbursement to repeat clients and suspending penalty on loans in the loan management system so as to assist clients were other measures put in place for them to remain viable. The loan book for credit only in the micro-finance sector, however, increased by 21% to ZW$565,5 million from ZW$$469,2 million in Q1. The increase reflected a slowdown in credit business during the peak period of the Covid-19 pandemic and lockdown period. "In a bid to fully reflect the true value of the micro-finance sector's balance sheet value in an operating environment characterised by high inflation and depreciating local currency, the sector responded by revaluing its fixed assets portfolio. This resulted in a surge of the fixed assets figures from ZW$83,6 million as at March 2020 to ZW$247,2 million," Zamfi noted. The sector also reported a significant increase in net profit from ZW$2 million as at March 31, 2020, driven by a majority of the MFIs posting huge positive net profits from other sources outside the core lending business such as investment income, revaluations of assets and advisory services. However, a record of 12 MFIs posted net losses which cumulatively amounted to ZW$41,3 million as at June 30, 2020, largely due to negative effects of Covid-19 pandemic operating environment, high operational costs, high inflation and a depreciating local currency.