It can be unsettling to open a daily newspaper and come across adverts announcing the imminent sale of loan defaulters’ assets, more so if it is somebody that you know.
As far as you were aware, they were doing quite well so what could possibly have gone wrong for their property to end up on the auctioneer’s block?
There are two extreme views. One is that this is the true reflection of the state of the economy despite all those impressive GDP growth figures government officials keep throwing at us. The other view is this is a direct result of dodgy financial management, something few wish to acknowledge, because it means taking the blame.
With high interest rates a constant factor, the real reasons can be found in between the two extremes. What is undeniable is business borrowers end up as defaulters, because they spent money on something other than paying back their loans.
Personal responsibility comes into play. A loan is not your money. It is an opportunity to use other people’s money to get ahead and improve your business outcomes. Although unexpected shocks will happen, banks can either be sympathetic or aggressive, depending on the question: ‘did you spend the money wisely and according to the original plan?’
It is important to appreciate the economic implications when an increasing number of people are not paying back their loans. The most unwelcome one is that banks begin losing the appetite to lend. It is worth recalling that politics aside, it was an accumulating heap of NPLs that ultimately brought down the state-owned Uganda Commercial Bank.
Speaking to the media in July after appearing before a parliamentary finance committee, Ramathan Ggoobi, the Ministry of Finance Permanent Secretary, wondered why all the fuss about government debt when plenty of Ugandans were becoming delinquent borrowers.
“I see there is a lot of interest in the debate about public debt in Uganda. However, many individuals who fear public debt are personally indebted to the marrow. Let Ugandans be as concerned about these debts as they are about public debt,” he said.
Ggoobi conveniently side-steps the fact, that many non-performing loans (NPLs) are directly linked to the government’s indebtedness. Several hundred business people are in financial distress, because of chronically delayed payments on government contracts even as the figure for domestic arrears continues to rise.
A couple of years ago, the Uganda Bankers Association (UBA) said NPLs arising from non-settlement of Government arrears has a bearing on operations, notably by impairing bank capital. It pushes interest rates upwards as pricing for higher risk which in turn affects trade and economic growth, since the government is the largest business driver.
In the aftermath of the Covid-19 pandemic, business owners took a big financial hit. The smaller your business, the bigger the shock; owners had to contend with sharply reduced profitability, mounting cash flow problems, and unexpected market changes.
Some companies are still either recovering or no longer operating as going concerns. This is in spite of the measures orchestrated by Bank of Uganda (BoU) and implemented by the commercial banks, to offer debt rescheduling options which all expired two years ago. Some business people and their companies have survived while others just ran out of viable options.
Due to how they do business, banks and other lending institutions are forever on guard against spikes in NPLs. A growing list of NPLs weakens the balance sheet which automatically reduces the ability to lend and also increases the cost of borrowing.
This is not all. The whole process of salvaging any money back on bad loans is expensive and can be messy, often attracting the kind of legal headaches and publicity banks prefer to do without.
“When you see property being advertised for sale, know that the bank is doing it as a last resort before a potential write off. All avenues for a compromise have been tried and ended nowhere. But that NPL sitting on your books has a direct negative impact on the bank’s profitability,” one banker told Business Times.
Before applying for a business loan, numerous financial advisers say make sure you understand the risks. Only borrow what you need and can realistically afford to repay according to your prevailing cash flow. On paper, everything seems doable, but making those monthly payments can turn out to be much harder than previously thought.
It begins with creating excuses for unplanned expenditure. Suddenly, your car is not good enough, so you buy a big SUV. To signify your enhanced financial status, (perhaps in between laying out cash for that Dubai trip and a new wardrobe), why not build a better house?
When money is readily available, the ‘wants’ tend to crush the ‘needs’. This unplanned expenditure can reach ridiculous proportions such that servicing the loan becomes an ever-bigger burden to bear.
According to the March BoU Financial Stability Report, asset quality started to deteriorate during the quarter ended March 2024. The ratio of non- performing loans (NPLs) to total loans (NPL ratio) for commercial banks remained relatively low, but rose to 5.1 percent from 4.6 percent in December 2023.
The financial regulator said there is potential for NPLs to rise further in the medium term, as indicated by several risk factors. First, expected credit losses (ECLs) remained elevated at UGX 908.4 billion in March 2024. Second, NPLs in the substandard and loss categories also rose by 36% and 2.3 percent to UGX 382.1 billion and UGX 280.9 billion, respectively.
The report states: ‘Therefore, going forward, NPLs are likely to rise further as the full effects of higher interest rates impact borrowers. Nonetheless, BOU continues to engage SFIs to enforce prudent credit risk management and ensure the mobilization of adequate capital to absorb potential shocks.’
This is why BoU directed commercial banks, technically known as Tier I financial institutions, to shore up their minimum paid-up capital. This increased from UGX 25 billion to UGX 120 billion by December 2023 and UGX 150 billion by the end of June 2024. BoU wants banks to have a bigger pool of funds to cater for the losses from bad loans and other financial calamities.
In its 2023 annual report, UBA stated: ‘Generally, a NPL to total gross ratio of around two percent to five percent is often considered to be a threshold for ‘good’ asset quality. The NPL to total gross loans for the Ugandan banking sector averaged 5.7% in FY 2022/23’.
Meanwhile Dr. Michael Atingi-Ego, the BoU Deputy Governor, is displeased with the emerging trend of Ugandans resorting to the courts of law when they find difficulties in servicing their loans.
Referring to the more than UGX 4 trillion currently tied up in litigation he said, “Ugandans get loans, but when time comes to pay, they run to courts.” Put in perspective, the UGX4 trillion is four times the annual amount of money the government is currently spending on the Parish Development Model (PDM).
When flushed with cash, banks are known to be very eager in lending to potential borrowers. Before signing on the dotted line, you just make sure you read all the small print. That loan can become a millstone around your neck.