NBE attempts to reduce loan defaults


Businesses have evaluated the recently amended, 2008 directive from the National Bank of Ethiopia (NBE) that gives more leeway to banking loan operations.
The amended ‘classification and provision directive no: SSB/69/2018’ issued two weeks ago by the regulatory body has given more iterations for short and medium term loans and gives a specific rescheduling and extension rate for long term loans. The directive now allows the banks to make their own decisions about conditions related to outstanding principal payments when they extend a payment system.
It also allows banks to provide additional loans to borrowers that are in trouble over debts.
Many business owners have praised this move from the governing body, since a significant number of businesses are in debt stress.
The business and bank experts told Capital that many more business owners are struggling in debt and defaulting on their loans than previous trends.
The Central Bank was aware of this issue and recently wrote a circular to financial firms telling them to hold the foreclosure and possessing loan collaterals, while the directive amendment followed the circular, which experts admitted will give the private sector some breathing room. In the past couple of years and particularly this past fiscal year access to finance like letters of credit has been a serious challenge for business. It has been also affected by the serious hard currency shortage that has shocked business engaged in imports as well as heavy and medium industries which depend on imported inputs and employ a lot of people.
However the business community and bank managers appear to be happy about the new directive. It has been claimed by those actors that the problem will not only solved by extending repayment period and providing further loans.
If you see locally based businesses mainly in the manufacturing industry that received loans they are having trouble settling the principals. “The majority, probably 70 percent, of the businesses have defaulted on settling their payments,” experts close to the sector complained.
They claimed that the NBE has also reflected on opening up access to hard currency for all sectors equally. “Currently the debt stress is not a challenge for all businesses in the country. For instance FDI’s are engaged in their products without any foreign currency challenges for importing their raw materials and spare parts,” experts said. “However industries in the same sector but based in Ethiopia stopping production because it is difficult to access a LC,” they added.
They claimed that the current situation followed by defaulting to settle their debt has forced industry owners to sell their facilities to others, mostly overseas investors. “Industries, which are owned by local investors, can easily access foreign currency from state owned and private banks when the ownership partly or fully is transferred to foreign citizens,” a business owner who is now under negotiation to transfer his industry to a foreign investor told Capital. He said that even though he produced import substitution products the current condition regarding allocation of foreign currency is unfair and encourages only the foreign investors. “The recent ratification on the directive of classification and provision will be meaningful if the factories are able to produce in a healthy manner. Otherwise the directive is only postponing the possession of collaterals, while at the same the interest rate is going up,” he added. However some of the local investors admitted that they have closed their business or are under negotiation to sell and get out from their business.
The manufacturers claimed that so far the central bank prefers to extend the loan settlement period rather than solving the hard currency issue.
They argued that the directive amended a year ago allowed FDI’s to access a significant amount of foreign currency on credit term that local banks are responsible for settling in the maturity period. “ However, instead of allocating a huge amount of hard currency for a single foreign investor it would be better if it was dispersed to all medium and large investors to balance they operation scheme,” they criticized.
The amended directive stated article 6/1/7 sub article C indicated that a bank shall not renegotiate short or medium term loans and advances to a borrower for more than 5 iterations, which had been 3 on the fourth amendment of the directive issued in 2008. The latest directive has also added iterations for long term loans for six times, while it was not stated in the previous directive.
The same article sub article D has also added that banks may extend additional loans and advances to a borrower who defaulted from their own bank with a view to rehabilitate loans and advances. This sub article is a new one.
In addition, the 2008 proclamation stated that banks have to collect 25 and 50 percent of the loan for second and third iterations respectively but the renewed directive deleted this enforcement. The new directive article 6/1/7 sub article D has stated that …. the manner of collection of interest and/or principals in arrears by the bank and issues related to grace period (where applicable) shall also be part of the renegotiation between the bank and the borrower depending on specific circumstances of the loan and capacity of the borrower.