The non-performing loans portfolio for banks in Uganda fell from 5.8 per cent in June to 5.3 per cent in September, reflecting gains made from write-offs and restructuring of credit facilities, supported by lower lending rates, according to central bank data.

However, NPLs stood at 6.2 per cent in March on account of high default rates, mostly by local traders, in the trade finance segment, due to renewed conflict in South Sudan, industry sources said.

“The falling NPLs are directly caused by write-offs of many doubtful and bad loans carried out in recent months and this has led to a diminished ratio,” said Phillip Sendawula, finance manager at Diamond Trust Bank Uganda Ltd. “These will in turn yield more incomes from credit recoveries made by debt collectors before the end of the year.

“But the impact of loan restructuring is not clear because of the tight rules set by Bank of Uganda, which tend to restrict options for maximising value out of these arrangements.”

Similarly, high default rates experienced in other sectors coupled with sluggish economic activity during the first half of the year dimmed hopes of improved earnings and prompted the industry regulator to tighten reporting rules for NPLs, analysts said.

For instance, banks were compelled to make provisions for doubtful or failing loans after the first two months of default instead of the traditional 90 days. Banks are also obliged to make credit provisions of 30 per cent against the loan value after the first three months of default on loan repayments.

Whereas this condition helped reinforce the industry’s ability to withstand large credit-related shocks, it also forced lenders to strengthen their loan assessment standards in order to minimise future default risks. More stringent credit standards often reduce default costs and the number of risky loans for lenders but equally restrict access to credit for less privileged borrowers who lack collateral.

In addition, several banks opted to write-off bad loans accumulated since 2013 in an attempt to create fresh room for lending, grow assets and generate new interest incomes before the end of the year. This led to diminished volumes of bad loans across the industry and subsequently brought down overall NPLs, industry players said.

Gross value

The gross value of NPLs fell by roughly Ush100 billion ($35.6 million) at the end of September compared with the Ush465.8 billion ($165.8 million) recorded in December 2013, according to BoU estimates.

Through restructuring of failing loans, commercial banks have seemingly succeeded in bringing down NPLs in their lending books over a 12-month period, the industry regulator said. Average lending rates dropped from around 23 per cent in September 2013 to 21.1 per cent by close of September 2014, BoU data shows.

“Personal and household loans have recorded the most remarkable improvement in credit quality while commercial mortgages have fared the worst,” said Benedict Sekabira, BoU’s deputy executive director for supervision.

“The decline in NPLs is largely caused by significant improvements in loans deemed bad and doubtful between September 2013 and September 2014 due to restructuring of credit terms and falling lending rates experienced in this period.

“However, bad loans that are written off contribute less to reductions in NPLs because of direct loss of assets and erosion of capital ratios. We anticipate NPLs to decline further at the end of the year because of falling NPL volumes recorded among the biggest industry contributors.”

Projected growth

Local players project strong growth in loans extended to the construction and personal loans segments in an effort to exploit opportunities presented by cleaner balance sheets.

“The drop in assets evidenced earlier this year has been compensated for by a sharp growth in loans and advances to the construction and personal loans segments, which will feed strongly into revenues next year,” said Claver Serumaga, general manager for business development at Bank of Africa Uganda.

READ: Ugandan banks likely to record low growth this year, says report

“Besides, remarkable loan recoveries registered by some banks have yielded considerable revenues this year. I expect overall NPLs to clock five per cent by the end of year.”

Private sector credit grew by 12.2 per cent in October compared with the nine per cent recorded in the same period last year, BoU statistics show.

While the building and construction sector and the trade sector posted NPLs of 5.5 per cent and 4.8 per cent at the end of September, personal loans recorded NPLs of 3.4 per cent in the same period. In contrast, the transport and communication sector registered NPLs of 8.9 per cent in the same period.