The RBZ tightens the screw on bank loans

The Reserve Bank of Zimbabwe (RBZ) has ordered banks to carry out on-site visits to customers who have taken out loans to ensure money is being used for its intended purpose, among other strict measures.

In a statement on Friday, RBZ Governor John Mangudya said his Financial Intelligence Unit (FIU) had completed investigations into possible abuse of loan facilities by 15 entities and found that the majority were using arbitrage-based business models.

“They make significant profit margins by borrowing on concessional terms, storing and then selling their produce in US dollars or Zimbabwean (ZW) dollars at inflated exchange rates in the parallel market, allowing them to easily repay the part of the proceeds and start the borrowing cycle again,” Mangudya said referring to the findings of the FIU investigation.

“Most of these entities generate significant revenues, in Zimbabwean dollars or US dollars or both, which are sufficient to meet their working capital needs. Instead of using their own revenues, they choose to fund most their working capital needs from concessional loans.

He added: “Some of the investigated entities abuse their access to loans by ‘multiplying’ across multiple banks. In one example, one entity simultaneously accessed ZW$6.5 billion in loan facilities from 12 of the 16 Many other entities would have loan facilities operating simultaneously at five or more banks.”

The FIU revealed cases where banks would access loans, ostensibly for their own working capital, but in reality for the benefit of third-party entities, either within the same group or unrelated.

There were also cases where a holding entity, with little or no own operations, borrowed heavily from subsidiaries, which themselves would have access to similar cheaper loan facilities directly from banks.

“These arrangements are a form of abuse of the financial system for material gain by taking advantage of cheaper borrowing and repaying when exchange rates have depreciated.

“In some cases, the loans were used as working capital but diverted to third-party entities for the purpose of financing currency purchases at the auction on behalf of the financing entities,” he said. .

In response, effective July 1, Mangudya said that no bank would provide a loan to any entity or individual at an interest rate lower than the prevailing bank rate.

“Banks implement appropriate due diligence measures to ensure that borrowings by holding entities on behalf of their subsidiaries are duly justified and that loans are used strictly for the intended purpose. Banks implement similar measures in the event that an entity is borrowing on behalf of an associated entity,” he said.

“Banks must also – (a) provide effective credit risk management, including loan monitoring and loan covenant enforcement, customer visits and other measures to ensure that borrowings are used for their intended purpose; and (b) ensure compliance with prescribed prudential lending rules prescribed by Banking Regulations SI 205 of 2000, and more specifically that: the total of loans and advances outstanding at any time or for a single debtor shall not exceed 25% of a banking institution’s capital base, and the total loans and advances outstanding at any time to a corporate group shall not exceed 75% of a banking institution’s capital base or 25 % to a single member of that group of companies.”

The FIU will also monitor transactions on an ongoing basis to ensure that loan proceeds as well as entities’ own revenues are not diverted to the illegal parallel foreign exchange market and to take punitive action when abuses are identified.

In addition, any entity found to have actively participated in the manipulation of exchange rates in order to derive illicit gains from loans will also be subject to prosecution.

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