Bank Of Tanzania Circular On NPLs

In this industry update, we provide an account of the Bank of Tanzania's (the BOT) Circular No. FA.178/461/01/02 dated 19 February 2018 (the Circular) titled "Measures to Increase Credit to Private Sector and Contain Non-Performing Loans".

The introduction of this Circular comes as a result of attempts to curb the general slow-down in private sector credit growth and the increasing number of non-performing loans (NPLs). The aim of this Circular is to provide guidance to banks and financial institutions on how to tackle the rising number of NPLs through specific strategies that banks and financial institutions would have to develop, as well as provide information on regulatory measures and reliefs that the banks and financial institutions can apply to NPLs. There is also a quarterly reporting requirement that banks and financial institutions will have to comply with. This report (format to be provided by the BOT) will inform the BOT on the banks' and financial institutions' progress in reducing NPLs and increasing good quality credit to the economy.

The banking industry benchmark for NPLs is set at 5 per cent, however, in the third quarter of 2017, unaudited accounts for 19 banks and financial institutions indicated that NPLs ranged between 4 per cent and 51 per cent, significantly higher than the benchmark. A higher percentage of NPLs means that banks and financial institutions make less profit because of the difficulties they have in collecting interest and principal on the loans. This also results in banks and financial institutions curtailing lending.

The BOT has recently revoked licences of several banks due to unsustainable NPL ratios while other banks with high NPLs have been given a 6 month period within which to improve their credit-granting processes.

Recommended strategies:

The BOT has recommended the following minimum strategies to limit NPLs:

a) Reduce NPL ratio to no more than 5 per cent by setting strategic objectives with time limits;

b) Set up a permanent recovery function with predefined roles and responsibilities;

c) Separation of duties in the credit department with independent units performing credit processing, sanctioning, monitoring, administration, and recovery and enforcement;

d) Involve top management for high risk cases and some recovery decisions;

e) Guidance and modalities for the following: i. outsourcing of collection specialist ii. management reporting iii. regulatory reporting to BOT (new quarterly...