Commercial banks wrote off Shs242 billion in form of bad loans in 2020 as the Coronavirus pandemic continued to batter the economy, a new report shows.
According to the Bank of Uganda Annual Supervision Report for the year ended 2020, weak economic activity that was occasioned by the Covid-19 induced lockdown saw aggregate write-off of bad loans rise by 46.9 percent from Shs165.2 billion in 2019 to Shs242.6 billion in 2020. Of this, Shs56.9 billion worth of bad loans was written off in the quarter to December 2020.
“Despite the pick-up in loan growth to some sectors, asset quality remains a major risk, due to the slow economic recovery, as indicated by; aggregate non-performing loans (NPLs) increased over the year ended December 2020 across all banking institutions,” the BoU report released on Wednesday, 02 June 2021 reads in part.
According to the report, the NPL ratio for commercial banks, credit institutions and microfinance deposit-taking institutions rose from 4.9 percent, 3.6 percent and 3.6 percent in December 2019 to 5.3 percent, 8.1 percent and 6.3 percent in December 2020, respectively.
“It should be noted that the rise in NPLs would have been higher but was effectively moderated by the Credit Relief Measures introduced by BOU, which have ensured that the economic stress faced by borrowers has a muted negative impact on SFI’s asset quality,” the report adds.
Asset quality, as measured by the ratio of non-performing loans to total gross loans and advances (NPL ratio), deteriorated in the year to December 2020, according to the report. The aggregate industry NPL ratio for commercial banks increased from 4.9 percent in December 2019 to 5.3 percent in December 2020.
“This was on the back of weak economic activity hampered by the onset of the COVID-19 pandemic which adversely affected the income of borrowers,” the report states.
There was a significant increase in the stock of NPLs by 22.4 percent (USh.156.3 billion) from USh.696.8 billion as at end December 2019 to USh.853.1 billion as at end December 2020. By sector, NPLs under the trade and commerce sector registered the largest rise of Shs.24.6 billion (or 11.8 percent), and the sector’s NPLs accounted for 27.1 percent of the industry stock of NPLs as at end 2020.
However, the utilities sector held the highest NPL ratio of 18.2 percent. The implication is that the adverse performance of the sectors where banks are highly concentrated can significantly affect the banks’ asset quality and profitability. “Going forward it is expected that the slow pace of recovery is likely to continue negatively affecting loan quality until economic activity is stronger,” the report states.