Banks have to revise interest rates, loans, says risk manager

Tuesday March 24 2020

A man counts fifty thousand shilling notes.

A man counts fifty thousand shilling notes. Arguably today, CoronaVirus is top on the agenda of every risk manager. PHOTO BY ERONIE KAMUKAMA 

By Ismail Musa Ladu

So far (at least by Thursday last week), no case has been reported in Uganda. But generally, should Coronavirus scare in the country be considered as a new risk to business in addition to the traditional risks we know?

Many organisations are generally aware of the traditional risks. However, important to note is that risk is continuously evolving.

Risk in simple terms is the effect of uncertainty on a country, business or individual’s objectives and it is measured on the continuum of likelihood and impact. Due to uncertainty, we deal with “known knowns”, “known unknowns” and “unknown unknowns”.

Coronavirus (Covid-19) was an unknown unknown; nobody probably in the country had a plan for managing such a pandemic – and with the outbreak it is now a known unknown.

We know that the risk exists and the likelihood of people and businesses being disrupted as well as the resultant impact are high.

Arguably today, CoronaVirus is top on the agenda of every risk manager. It has changed the professionals’ outlook to risk management; requiring a great deal of agility and open-mindedness.

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If this situation continues to disrupt normal flow of business operations, do you think the banking sector should consider waiving interest rates on loans?

Undoubtedly, the pandemic will have significant impact on the size and quality of the asset book of banks. Many banks have borrowing clients operating in different sectors such as trade and commerce, agriculture, construction etcetera. These customers run businesses through credit lines from banks for trading/importation purposes; moreover, importing from some of the already Coronavirus ravaged countries like China and Italy.

With the preventive measures that are currently under implementation following the President’s directives, there is already an outcry that there will be a liquidity squeeze amongst individuals.

Consequently, loans are going to start going bad as a result of travel bans as well as slow economic activity. To avert the consequence of heightened credit risk, banks through the Uganda Bankers’ Association in collaboration with the Central Bank (BoU) may have to consider, on a minimum, revising the interest rates as well as restructuring the loan facilities just like we have seen Rwanda do through a directive from the National Bank of Rwanda (BNR).

Further interventions being debated include granting repayment holidays to borrowers, deferment of dividend payments for liquidity preservation; among others.

As a major sector, how would you respond to a pandemic of this nature or how prepared are you in dealing or going through this should it hit the economy hard?

The pandemic is already having serious implications for the global, regional and local economies pointing towards a slow-down in trade, earnings as well as tax revenue.

The Uganda Bankers’ Association has already issued an Industry Response Framework to all banks detailing among others; Precautionary guidelines for staff, customers and businesses.

Guidelines for financial institutions to limit or minimise impact and manage business continuity in case of an outbreak. And general outlook - Potential Business and Economic impact.

Do you agree with measures that the government is undertaking in dealing or mitigating the situation before a case has been reported?
I totally agree. Prevention is better than cure.

With the scare in the country and elsewhere especially in Asia and Europe, where the pandemic is hitting hard, how do you see the banking industry balance sheet closing by the end of the year?
The value at risk portfolio-wise will increase. Most balance sheets will definitely shrink and so will the bottom lines be impacted due to the slowdown in economic activity that COVID-19 has caused.

Briefly, how long or quickly do you think the economy, including the banking sector will take to recover from this pandemic?
The impact of such a pandemic can be felt even three to five years later after it is long gone within six months. Businesses will collapse or get at the brink of collapse and they will need to be resuscitated.

The impact of non-performing loans on financial institutions will linger around for three to five years. Stability/Normalcy will take time. Shareholders will have to make more capital injection into business to re-capitalise, there may be some business re-engineering and re-strategising to be done.

How should businesses navigate this tricky terrain?
Follow the basics first; I re-emphasize that prevention is better than cure.
All is better when we are alive so let businesses put in place simple and clear business continuity plans on how to manage the crisis should the eminent outbreak occur.

The Government of Uganda through the Ministry of Health and President Museveni have issued guidelines and it is incumbent upon all to remain sensitised and observe the guidelines.

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