Banks have been advised to help their borrowers struggling to repay debts to turnaround their fortunes as risks for default is seen to be rising due to tight liquidity in the market.

An auditing firm, KPMG says bank’s bad debts, commonly referred to a non-performing loans (NPLs) stand 8.3 per cent on average as of last year, hence elevating risks for default.

The country benchmark for NPLs is 5.0 per cent.

Experts worry that recently a rise of capital adequacy ratio, shifting of government funds from commercial banks to the central bank and austerity measures have added salt to the wound of already uncertainty of non-payment margin.

KPGM, Head of Debt Advisory and Restructuring East Africa, Nigel Smith, said in analysing the trend, one does not need to be genius to see elevated risks for defaulting as NPLs increases amid tight liquidity.

“Bankers here told me it needs a miracle to exceed 50 per cent net from recovering action… and it takes a painful three-five year to settle a case,” Mr Smith told bankers in a breakfast meeting organised by KPMG on turnaround strategies in Dar es Salaam yesterday.

Mr Smith said turnaround companies have farfetched benefits to banks, companies, government, employers and economy as more tax are expected to be collected unlike if they would go into receivership.

“Turnaround culture is a global trend. It helps lenders to recover its principal and interest unlike receivership and liquidation,” he said. The trend is to start working on pre-default level that way diverts from non-payment and banks stop provision for bad debts which at the end of the day cut profitability.

The turnaround has shown 90 per cent of success in the span of three and six months unlikely court procedures that takes over five years and recovers less than 50 per cent of principal amount.

Bank of Tanzania (BoT) monthly economic review of June shows bank credit to the private sector went down 16.2 per cent in May, down from 19.3 per cent in April.

“A large slowdown in growth was particularly marked in transport and communication, building and construction, hotels and restaurants and personal activities,” the report shows.

A representative from Amana Bank said reduction of goods at Dar Port raised concerns of business uncertainty for transporters which may make it more difficult for them to repay back their loans.

BoT’s representative Sagati Musa said as regulator they support the turnaround idea as it assists on recouping would-be-bad-debts instead of other methods – including pumping more capital.

“The problem I see is bank’s expertise on turnaround firms… (and) change banks way of approaching defaulters,” Mr Musa said.

Article by Abduel Elinaza, AllAfrica