Rwandan banks experiencing increased credit risk | The New Times
The Covid-19 pandemic and measures to curb it have seen local finance institutions experience increased credit risk, the central bank has said.
The central bank’s latest assessment of the financial sector has revealed that the pandemic had weakened the capacity of borrowers to service their loans, thus effectively raising risks of default.
The Central bank’s Financial Stability Committee meeting on Thursday, February 18, which was chaired by Governor John Rwangombwa noted that Gross Domestic Product (GDP) contracted by 4.1 per cent year-on-year in the first three quarters of 2020.
The pandemic and consequent containment measures haven reduced incomes of households and businesses thereby weakening debt service capacity, the central bank said in a statement.
Among responses by the local financial sector to the challenges has been loan repayment deferrals to their customers to allow them time to ‘recover’ financially.
By end of December 2020, Rwandan banks had restructured loans worth Rwf799.9 billion representing 31.7 per cent of total loans while the microfinance sector restructured loans stood at Rwf14.8 billion representing 7 per cent of total loans.
“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 into 2022,” the Central Bank noted.
However, despite the stress on local banks, the financial sector remains adequately capitalized and liquid. The banking sector’s total Capital Adequacy Ratio stood at 21.1 per cent as of the end of December 2020, higher than 15 per cent minimum prudential requirements.
“The strong capital and liquidity positions enabled financial institutions to support financial intermediation as well as extend various relief measures to customers,” the central bank noted.
Assets of the banking sector grew by 24 per cent (year-on-year) to Rwf4,310 billion as of December 2020 (and represented 53 per cent of GDP), against 12.5 per cent registered in December 2019.
The increase was driven by the growth of deposits (especially institutional investors), borrowings from other financial institutions and capital injection.
Microfinance sector’s assets increased by 11 per cent to Rwf356 billion in December 2020, lower than 14.7 per cent in 2019.
This was a consequence of the pandemic’s impact on the cash flows of households, micro, small and medium enterprises thereby reducing their capacity to save and increasing their deposit withdrawal needs to cater for the pandemic uncertainties.
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