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The National Bank of Rwanda wants timely and accurate provisioning by lenders to avoid a cliff edge.

Gaining more insight into the credit risk profiles, the capital strength and operational resilience of Rwanda’s banks are among the top supervisory priorities for the nation’s central bank, as the sector adapts to remote working to help curb the spread of the covid-19 pandemic.

At its meeting on February 16, the National Bank of Rwanda’s (NBR’s) financial stability committee recommended greater supervisory attention to credit risks, particularly around assessing potential borrower defaults and the proper classification of loans.

The Rwandan central bank called for timely and accurate provisioning by lenders to avoid a cliff edge and pro-cyclical effects that could amplify the economic downturn and undermine financial stability.

The committee also expressed concern that institutions remain resilient enough to continue delivering critical services.

Like many other countries, the pandemic led to social restrictions in Rwanda, which have hit the economy. The NBR said the economy had contracted by 4.1% in the first three quarters of 2020, compared with the same time the year before. This saw falling household and business incomes, weakened debt servicing capacity and increased credit risk.

Significant restructured loans in the financial sector are indicative of a potential uptick of non-performing loans and provisions for bad loans in 2021 and 2022

NBR financial stability committee

S&P Global Ratings recently reaffirmed Rwanda’s credit rating at B+, with a negative outlook due to the pandemic. It expects the economy to grow by 3.9% this year and to average 7.1% between 2022 and 2024. It estimated the government’s support package at around 5% of gross domestic product (GDP) over fiscal 2021–2023.

In October, rival rating agency Moody’s Investors Service forecast the country’s debt burden to climb to over 70% of GDP by fiscal 2021, up from 52% the same time a year ago, leaving the country more vulnerable to future shocks.

Meanwhile, banks responded to the downturn by providing loan repayment deferrals at the end of December last year and by restructuring RwFr799.9bn ($8bn) in loans, representing 31.7% of all loans, the financial stability committee reported.

“The significant restructured loans in the financial sector are indicative of a potential uptick of non-performing loans and provisions for bad loans in 2021 and 2022,” the committee said.

Reduced risk appetites

In an interview with news outlet Taarifa Rwanda on February 11, Diane Karusisi, chief executive of the country’s largest bank, Bank of Kigali, said that when the crisis struck, the bank waived late payment charges and restructured fees to support businesses with uncertain cash flows. She said this was followed up with relief through moratoriums, refinancings and through affordable working capital facilities provided by the government.

Ms Karusisi added that the pandemic had reduced risk appetites, and that Bank of Kigali had become more cautious in its lending. She predicted that hospitality and commercial real estate would see less financing, but that agro-processing and light manufacturing would see a boost.

Meanwhile, the financial stability committee said there has been a sharp uptake in digital services, with the number of active mobile payment subscribers increasing by 13% to 4.7 million individuals, while mobile transactions soared by 85% to RwFr7.2bn last year. The use of other electronic banking services also increased significantly.

The committee said it expected the financial sector to remain resilient in the near term, on account of existing capital and liquidity buffers and with an expected economic recovery and national vaccine programme against Covid-19.

The financial stability committee noted that assets in the banking sector had increased 24% year-on-year to RwFr4.3tn in December 2020, compared with 12.5% growth in 2019. Borrowings from other financial institutions were among the key drivers of this growth.

The banking sector’s aggregate tier 1 capital adequacy ratio (CAR) and total CAR stood at 20.3% and 21.1% respectively at the end of December 2020 — well above the 12.5% and 15% minimum requirements.

During the same period, the aggregate liquidity coverage ratio (LCR) was 254.7%, compared with the 100% requirement. At its previous financial stability meeting on November 12, which focused more on economic and monetary matters, the committee said banking system liquidity was resilient, helped by supportive measures from the central bank and the government.

This article first appeared in The Banker’s sister publication Global Risk Regulator.

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