Impact of it on bank performance

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Impact of it on bank performance

As a result, the relationship between NPLs and the quality of bank assets has increasingly gained prominence in recent years in view of its impact on the lending behavior and overall condition of the banking sector.

The deterioration in the quality of bank loans has been identified as one of the major causes of banking sector instability Demirguc-Kunt, ; Bar and Siems, In Zimbabwe the levels of NPLs has been increasing since the adoption of the multi-currency in The growth in NPLs led to a decrease in credit growth which has undermined economic recovery prospects.

NPLs are identified as one of the causes of economic slowdown through their adverse impact on loan dispersal Hou, Prior to dollarization, the operating environment was difficult for banks, as the economy experienced hyperinflation, high levels of money supply growth, distorted prices and acute foreign currency shortages.

The high levels of NPLs resulted in banks carrying out internal consolidation to improve asset quality rather than distributing credit Kueger and Tornell, Consequently, banks had to make provisions for loan loss thus reducing funds for new lending.

The need to re-build capital also entail that banks cut down on lending Hou and Dickinson, On the demand side, the slowdown in economic activity and loss of purchasing power by individuals resulting them being unable to qualify for or access loans and a slowdown in lending.

This view is supported by Baul et al,whose study found out that that credit creation is impacted by both macroeconomic variables as well as internal structures.

Asantey and Tengeyargued that bad loans had a negative effect on bank lending potential in Ghana. These findings were also supported by Appiah and Awunyo-Vitor Bad loans do not only limit lending but have multi-dimensional effects that include reducing profitability among commercial banks, a deterioration of bank assets, erosion of bank capital, efficiency problem for banking sector and at the government level, can pose challenges to the pursuit of macroeconomic stability and growth objectives.

Statistics from the Reserve Bank of Zimbabwe show that non-performing loans has generally been on the high side even prior to the adoption of the multi-currency system in Over the period to non- performing loans averaged The use of the domestic currency entailed the existence of the lender of last resort window and hence the banking sector had access to liquidity support from the Central Bank and was able to continue extending credit even for speculative purposes RBZ, Following the tightening of the accommodation window by the Central Bank post NPLs declined to 5.

In addition, the hyper inflationary environment that prevailed over this period, reduced or wiped off debts and hence the lower NPLs. On a banking subsector by subsector analysis, for the period ending Junemerchant banks recorded the most pronounced deterioration, with the ratio increasing from 1.

The commercial banks ratio grew from 1. This resulted in the growth in the NPLs to Reflecting the rise in NPLs, credit to the private sector, followed a downward trend since Decemberfalling from falling The fall in growth in private sector credit was also against a background of limited domestic resources and subdued foreign lines of credit, RBZ, The slowdown in lending is also due to the difficult macroeconomic environment, which saw real economic growth declining from two digit levels post to 3.

The high level of NPLs is, therefore, a significant risk in the banking sector in Zimbabwe, whose impact on credit developments can be a drag on the economy.

Zimbabwe has experienced a decline in credit to the private sector from The question is therefore, which factors have contributed to the decline in credit growth and to what extent can this be explained by the increase in the level of NPLs? The study will pursue the following specific objectives: The NPLs, apart from being a source of concern for financial stability have led to a decrease in credit growth and fall in economic activity.

Since the incurrence of bad loans is part of the normal bank business it is important that regulatory authorities can establish threshold for bad loans above which action should be taken. However, literature to examine the impact of NPLs on lending is limited.

This study therefore seeks to contribute to this study by assessing the extent to which the high levels of NPLs have constrained the growth of credit in Zimbabwe under the multi-currency system.

The rest of the study will be organized into section 2 focusing on how the behavior of bank lending is affected the growth of NPLs, section 3 reviews the empirical literature, the methodology is discussed in section 4 and discussion of findings dealt with in section 5.

Impact of it on bank performance

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