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Alarms raised as personal loan arrears pass P3bn

Cash in hand: COVID-19 is worsening the debt crisis for many households PIC: MORERI SEJAKGOMO
Arrears owed by individual customers to local commercial banks rose by 11% to P3.1 billion last year, with nearly P1 billion classified in the worst category of indebtedness, BusinessWeek has learnt.

The trend has prompted a local financial advisory to urge more action by regulators, including frequent audits of lenders to ensure they are not over-burdening borrowers.

Bank of Botswana numbers unveiled this week show that of the P3.1 billion owed in arrears by individuals to commercial banks as at December 2020, about P1.4 billion was less than 180 days old, while P765 million was more than 180 days old. Another P998 million was classified as ‘specific provisions’ the worst category of arrears among banks.

The coronavirus (COVID-19) pressurised bank customers’ disposable incomes, limiting their ability to fulfill loan obligations, even as banks cut back on loan extension. The risk aversion by banks saw annual credit growth to individuals falling from 13.7% in December 2019 to 7.3 percent in December 2020.

SCI Wealth, certified financial planners and licensed investment advisers told BusinessWeek the zero nett pay phenomenon was on the rise in the country, as an indicator of irresponsible lending and high indebtedness. Zero nett pay occurs when people pay out more interest, loan obligations and other expenses in their salaries than they earn.

“The zero nett pay phenomenon is still rising, largely due to borrowing to fund lifestyle expenses such as cars and furniture, which then reduces the individual’s disposable income, and consequently the individual’s ability to save for emergencies,” Tiro Howard, an SCI Wealth financial planner said.

“Unlicensed microlenders and SACCOS institutions (savings cooperatives) are definitely escalating the situation as they still have poor controls on borrowing.

“The regulator needs to perform random audits on lending institutions and especially micro-lenders and hire purchase schemes.”

He added: “These audits would expose breaches of the lending ceiling and will thereby

ensure that these institutions only lend to an individual what they can afford to pay back. Strict penalties need to be imposed on any lending institutions that do not comply.”

Howard said more businesses, particularly SMEs, were also piling on debt in order to fund wages and overheads.

“This is especially true for businesses in the SME scale, as they tend to be owned and managed by one or two individuals.

“These businesses tend to ignore the need to save when times are good – and therefore need to borrow to fund cash flow for emergencies such as COVID-19,” he said.

Meanwhile, the Bank of Botswana, which regulates commercial banking activities, said the household debt situation remained stable, although there were concerns about the level of unsecured loans.

“There continues to be a risk to asset quality associated with the high proportion of the relatively more expensive unsecured lending (at 71.5% of household credit in December 2020) in commercial bank credit,” the BoB said in its recent Monetary Policy Statement.

“This profile of assets potentially exposes the household sector to any sudden and sharp increase in borrowing costs and loss of employment. The risks are, however, moderated to the extent that credit is widely distributed to a large number of employees in different sectors of the economy, a large proportion of which are in the public sector.”

For his part, Howard urged borrowers to live well within their means.

“Remember, if you are borrowing, you’re making your future-self poorer. All debt needs to be repaid plus interest. The only route to real wealth is sensible saving and investing – to grow and make your money work for you.”


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