Treasury tightens lending conditions
GOVERNMENT has moved in to protect depositors’ funds and the collapse of some financial institutions by restricting the amount of loans banks can extend to all insiders and their related interests or close relatives.
This comes after many financial institutions went under as a result of unsound financial management including major shareholders and senior executives recommending dishing out of huge loans to friends, relatives and some firms where they had stake without due diligence and proper risk assessment.
Through Statutory Instrument 265 of 2020, Banking (Amendment) Regulations, 2020 (No. 5), Government has since moved in to limit damage that interested parties can have on the going concern status of a financial institution by setting limits on the amount of loans insiders can have directly or indirectly.
“It is hereby notified that the Minister of Finance and Economic Development has, in terms of section 81 of the Banking Act (Chapter 22:24) and in consultation with the Reserve Bank of Zimbabwe as required by subsection (5) of that section, made the following regulations: —
“(2) In addition to the requirement set out in section 35 of the Act, no banking institution shall knowingly extend any loan or advance to or for the benefit of any insider or any close relative or related interest of such insider if the aggregate of the new loan or advance added to the total of any other loans or advances given to the insider and any of the close relatives of the insider will exceed 10 per centum of the institution’s paid-up equity capital,” reads part of SI 265 of 2020.
According to the new amendment, if the aggregate of all loans, advances or extensions of credit, including any proposed new extension of credit, to all insiders and their related interests or close relatives, exceeds 100 per centum of the banking institution’s paid-up equity capital then they must not be given a new loan.
Loans to insiders can only be extended if they are at the same terms including eligibility, interest rates and collateral as those prevailing at the time for comparable transactions by the banking institution with other persons that are not insiders.
Insiders and related parties must be denied access to new loans if any other loan to them is non performing.
For the purposes of section 35 (3) of the Banking Act, the maximum amount of credit that can be granted to an insider without the conditions under section 35 (3)(a) to (d) shall be fifty thousand dollars or 1 percent of the institution’s minimum capital, whichever is the lower.
“No banking institution shall extend loans or advances amounting to more than 10 percent of its minimum capital to or for the benefit of any partnership of which one or more insiders or any close relative or related interest of such insiders are partners,” reads part of SI 265 of 2020.
In addition, the total amount of credit extended by a banking institution to a partnership shall be
deemed to be extended to any member of the partnership.
“Every banking institution shall at the end of each quarter, submit a report on its insider loans in the manner and form as may be directed by the Registrar.”
The amended regulations now require that on appointment and annually thereafter, every director of a banking institution or a controlling company, shall deliver to the chief executive officer of the institution or company, in Form DI, a disclosure of Interests.
Insider loans have for long been a major concern for the banking sector.
In 2016, the Deposit Protection Corporation (DPC), dragged the defunct Interfin Bank's majority shareholder Farai Rwodzi to the High Court seeking to recover over US$136 million as compensation for prejudice caused by his negligence.
In the summons issued against Rwodzi, the DPC said Rwodzi used his influence as the shareholder to acquire loans, which he used to service personal debts and for entities in which he had a direct or indirect interest, while at the same time prejudicing the bank of US$136 097 897.
“On diverse occasions first defendant (Rwodzi) wrongfully and unlawfully or fraudulently utilised his influence as a controlling shareholder in the bank and caused the board of directors of the bank and/or the employees of the bank to grant loans to companies or entities in which first defendant had a direct or indirect interest in circumstances where no proper security was granted or pledged,” DPC said in its founding affidavit.
Another bank, Capital Bank closed after it emerged top shareholders of its holding company borrowed millions of dollars of depositors' funds in breach of banking regulations.
In 2015, our sister paper The Sunday Mail reported that central to the outflow of cash to top shareholders at Capital Bank was Patterson Timba, who was the largest shareholder and effective controlling shareholder in Renaissance Financial Holdings, which owned 100 percent of Renaissance Merchant Bank.
Investigations by the RBZ found he and close colleagues borrowed millions of dollars through loan schemes unsanctioned by normal banking systems.
The unsanctioned loans to directors left the bank with a capital deficit of US$16,6 million and in need of a capital injection of US$31 million to restore the capital base to required levels at that time.
The RBZ probe established that besides taking the lion's share of the bank's loans, Mr Timba compromised the bank's liquidity through obtaining loans or funds from other financial institutions on the back of money market deposits placed by Renaissance.