Following the guidelines from Bank of Uganda (BoU) on loan restructuring due to the current impact of Covid-19, the Uganda Bankers Association (UBA), has said loans worth Shs2.028 trillion have been restructured.
In a presentation to Committee on National Economy in Parliament last week, about ‘Covid-19: Implications, challenges, opportunities and insights for the banking industry,’ the Executive Director of UBA, Mr Wilbrod Humphreys Owor said: “As at the end of April, first month of restructures, 758,785 restructuring applications worth Shs2.788 trillion were received, 755,650 were accepted (99.6 per cent) worth Shs2.028 trillion.”
Mr Owor explained to the Parliamentarians that trade took 24.7 per cent, services 21.4 per cent, agriculture16.5 per cent, real estate 16.03 per cent, manufacturing 9.5 per cent and salary loans 11.5 per cent.
On April 6, 2020, the Bank of Uganda granted exceptional permission to Supervised Financial Institutions (SFIs) to restructure loans of corporate and individual customers, including a moratorium on loan repayment for borrowers that have been affected by the pandemic, on a case by case basis at the discretion of the SFIs for up to 12 months, effective April 1, 2020.
On April 14, Bank of Uganda again issued a guideline on credit relief and loan-restructuring measures to all SFIs during the Covid-19 spelling out that loan restructure is applicable only to credit facilities not classified as loss as at March 31, 2020.
The Bank of Uganda stated in the circular guideline that in the 12-month period with effect from April 1, 2020, a maximum of two restructurings is allowed for any credit facility, irrespective of the number of times it has been restructured in the past.
The Central Bank explained in the circular: “The accommodations on restructuring provided for herein are motivated by the Covid-19 and will be valid until March 31, 2021. Bank of Uganda may, however, extend this deadline in the future depending on the evolution of the effects associated with the Covid-19.”
Uganda’s banking industry has been having relatively low levels of Non-Performing Loans (NPLs) below 5 per cent in the recent years.
However, with the impact of Covid-19 in place, Mr Owor said NPLs are projected to increase to between 6.1 per cent to 12.3 per cent by December 2020, although the measures issued by Bank of Uganda in April will go along way in cushioning the situation.
“Sectors worrying us include real estate, education, transport, hospitality,” he added.
Speaking about collateral valuations, he said a slowdown in economic activity likely to reduce property prices and by extension lower valuations.
“This has a risk to having loan to value exceed 100 per cent pausing a fall ack risk to recoveries where there is default,” he said.
The Covid-19 has resulted has resulted into disruption on economic activities in Uganda pointing to risks and uncertainties for Financial Institutions (FI’s).
Mr Owor said there are a number of majors the financial institutions are facing, which includes credit risk, strategic risk, liquidity risk and capital adequacy risk, operational risk, litigation risk and compliance risk.
On credit risk, he said, there is possibility of default or delayed payment on loans, decline in the quality of the credit book, decline in the value and quality of collateral.
Under strategic risk, he said, diminished returns due to low transaction volumes, lost revenue and low demand for loans and advances, reduced business growth, interest rate risk due to global interest rates drop.
Liquidity risk and capital adequacy risk, he said, is due to the depressed economy and low deposits, foreign direct investments down, adding that in the event of material deterioration in the macroeconomic environment driving a large increase in NPLs.
Third party suppliers of critical services failure to supply or support in case of downtime, staff productivity, morale and mental health, internal risk, fraud, reputational and insider risk, increasing cyber risks as banks focus on digital means of communication and transaction.”
Regarding litigation risk and compliance risk, he said, clients may fail or refuse to pay their rescheduled loans and resulting interest rate component
“Litigation - in case staff are infected from work. With the credit relief guidelines in place, the risk of misinterpretation, Breach on some key regulatory ratios,” he cautioned.
Covid-19 has resulted has resulted into disruptions on economic activities in Uganda pointing to risks and uncertainties for Financial Institutions.