Financial discipline reduces bad debts

Mr Mafuru--NBC Chief
Rising financial discipline and responsible borrowing are among the major factors that have greatly contributed to reduce nonperforming loans.

Commercial banks and financial institutions are obliged to loan prudently to earn profit and avoid being plunged into heavy losses, thus protecting depositors’ funds.

Bankers say that the fall in the incidences of non-performing loans is a result of major drives to consolidate their balance sheets, following cases of some lending institutions having suffered from increased impaired losses and advances in the past.

“There is a growing awareness and sensitivity in the use of money borrowed from lending institutions…that also contributed to declining defaulting rate,” says Tanzania Bankers Association (TBA) Chairman Laurence Mafuru.

He charges that there is rising financial discipline among borrowers who use the borrowed money responsibly to generate extra income for paying back the debt.

Commercial bank’s continued efforts to create financial awareness and take actions against defaulters helped to reduce the rate of nonperforming loans.

“If borrowers are aware of their obligation to payback the loan and if the economy is growing positively, defaulting rate will eventually be minimal – and the level of the nonperforming loans will fall,” says Mr Mafuru.

According to the International Monetary Fund (IMF) Country Report- Third Review under the Policy Support Instrument, the banks’ efforts to strengthen debt collections have intensified deployed strategies to pull the defaulting rate down.

 “Nonperforming loans were eight percent of total loans at end-
September, down from nearly 10 percent at the beginning of the year, reflecting efforts to strengthen loan collection and tighten underwriting standards,” states the report.

Bank of Tanzania’s (BoT) efforts to ensure compliance with regulations on loan classification and loss recognition, particularly for commercial banks with higher defaulting rate, coupled with revised risk-based supervisory framework helped check high defaulting rate.

The IMF report says that the financial sector remains well-capitalised, with overall capital of 17.4 percent of risk-weighted assets.

According to the central bank’s 2011 Financial Stability Report, the 2009 second half witnessed a decline of nonperforming loans to 6.7 per cent from 7.8 of the previous period.

However, the 2010 first half saw an upward trend of nonperforming loans due to limited debt service by businesses whose profitability was impacted by the global financial crunch.
Source: The Daily News,www.dailynews.co.tz, reported by Sebastian Mrindoko
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