Risks to the banking sector remain imminent
THE risks to the domestic banking sector remain imminent, but could subside as the Namibian economy recovers in the near to medium term, and measures adopted by the Bank of Namibia (BoN) take effect. This is mainly because as economic activity recovers, the nonperforming loan (NPL) ratio may start declining, thereby reducing credit risks to the banking sector.
This is stated in the recently released Financial Stability Report by BoN and the Namibia Financial Institutions Supervisory Authority (NAMFISA) for April 2021.
The report shows that to mitigate the impact of the deterioration in NPLs on the banking sector, BoN implemented additional regulatory reporting to monitor heightened credit risk in the banking industry.
Specifically, the central bank implemented closer monitoring by engaging with banking institutions on a bilateral basis, and initiating monthly reporting of credit risk indicators, which also includes operational and liquidity risk updates and the conduct of solvency stress tests to closely monitor the downside risks emanating from the Covid-19 pandemic.
The report further stated that provisions were also made for non-conforming exposure to ensure that it is, as far as possible, fully asset-backed.
“Liquidity risk was not of concern during 2020 because the liquidity ratio was well above the statutory minimum requirements,” reads the report. The significant cuts in the repo rate had adversely affected the profitability of the banks, with the repo rate at the lowest historical rate of 3.75%. All these developments have put a strain on the banking industry, leaving it in a vulnerable position.
Although still adequately capitalised and liquid, the severe cases of the stress test indicate that the banks barely meet the minimum capital adequacy ratio (CAR).
In this regard, it is important for BoN to continue monitoring economic performance and the balance sheet of banks to stand ready with interventions as needed to support the economy.