Commercial banks in Uganda are now reporting non-performing loans (NPLs) broken down by currency, complying with the regulator’s move to cushion the lenders against currency fluctuations.
Bank of Uganda (BoU) in its financial stability report for the period ended June 2013 said that it was monitoring the growth of foreign currency-denominated loans to reduce risks associated them.
“The BOU has strengthened its monitoring and surveillance of factors which might pose potential risks to the banking system. All commercial banks have begun providing data on their NPLs broken down by the currency denomination of the loan,” Prof Emmanuel Tumusiime-Mutebile, governor BoU in the report that was released last week.
At the beginning of this year, the regulator said that it would enforce short-term borrowing limits on foreign currency loans by commercial banks and increase capital ratios as it was concerned about the rise in dollar denominated loans in 2012 to businesses and commercial banks.
BoU said that total non-performing loans as a ratio of total lending fell to 3.9 per cent in June 2013 from a peak of 4.7 per cent in March 2013.
“The improvement in asset quality has been particularly pronounced in the building and construction sector whose NPLs ratio reduced by 1.5 per cent in the year to June 2013,” said the regulator.
The building and construction sector has been one of the largest recipients of foreign currency loans which have been fuelling its growth at a rate that brought concerns to the regulator last year.
BoU said that a survey was this year conducted to obtain information on foreign currency denominated bad loans by sector between 2006 and 2013 and that the results show that credit risk from foreign currency loans remains low.
“The ratio of foreign currency NPLs to foreign currency loans was only 0.8 per cent at June 2013. The trade and commerce and mining and quarrying sectors contributed the highest percentage to the foreign currency NPLs,” said BoU.
The regulator however said that risks remain and a real depreciation of the exchange rate may increase the debt burden of borrowers in foreign currency and increase bad loans.
The volume of foreign currency loans rose by 2.8 per cent to Ush3.13 trillion ($1.23 billion) as at the end of September from Ush3.04 trillion ($1.17 billion) as at the end of June 2013 according to BoU’s data.
In June, the volume of foreign currency loans had dropped by 3.9 per cent from Ush3.17 trillion ($1.18 billion) as at December 2012, after jumping by 56.3 per cent from Ush20.3 trillion ($821.8 million) as at December 2011.
The drop between June this year and December last year has been attributed to the new measures introduced to curb the growth of dollar denominated loans.
The building and construction sector received 25.4 per cent of the total foreign currency loans last year and loans to this sector had more than doubled according to BoU.
The regulator introduced the new rules for banks, aimed at mitigating price bubbles, particularly in the real estate sector.
In partnership with the Uganda Bureau of Statistics, BoU also started compiling data price movements in the real estate sector.
“The global financial crisis which began in 2007 showed how unsustainable real estate booms can lead to a build-up of financial risks and lead to bank failure. The aim of compiling real estate indices is to facilitate the analysis and amelioration of such risks,” said BoU.