COMMERCIAL banks have not been given risk-free financing from the Bank of Zambia’s K10 billion Medium-term Loan Facility, hence the need for them to still demand collateral from prospective borrowers, says the Bankers’ Association of Zambia (BAZ).

But the Association has commended the Central Bank for widening the scope of eligibility from financial institutions by including a grant that would come in form a principal shareholder as part of collateral to access the loan facility.

According to the BoZ’s terms and conditions for the K10 billion stimulus package, Financial Service Providers must be in a sound financial position and should provide valid and enforceable collateral for them to access the facility released by the Central Bank.

The K10 billion medium-term loan facility was made accessible and effective, April 15, to help businesses cope with the devastating effects of the COVID-19 outbreak.

“To be eligible, the FSP, should at the minimum: be licensed by the Bank of Zambia; should have a settlement account with the Bank. Where the FSP does not have a settlement account, it will be required to provide a settlement account that it has with a commercial bank; be in a sound financial position as determined by the Bank of Zambia; and be able to provide the Bank with valid and enforceable collateral of the type specified under section eight. Meeting the minimum requirements is not a guarantee to access the facility. The Bank reserves the right to determine access and can reject or accept an application by an FSP for any other reason it deems appropriate,” BoZ stated.

“An eligible FSP shall submit an application for an advance in the manner prescribed by the Bank. The application must be supported by relevant documentation as outlined below: Written application for the advance from the facility with name(s) of client(s), sector operating in; terms for the on-lending; collateral offered and any other pertinent supporting information; a board resolution authorising the FSP to obtain the advance from the facility; latest audited financial statements and the latest balance sheet position; a statement of current holdings of government securities as well as a list of other eligible collateral as specified in section eight of this document; and FSPs without settlement accounts at the Bank should submit bank details of the settlement account held with a commercial bank. An eligible FSP shall also provide details of how it will ensure that the benefits obtained on the facility reach its respective client (s). The Bank will closely monitor the performance and use of the advance obtained from the facility through regular reporting as provided for under section 14 of this document.”

Commenting on the BoZ’s conditions, BAZ chief executive officer Leonard Mwanza said that the facility remained high-risk for commercial banks, and that prospective borrowers were still being subjected to rigorous checks of collateral before they could access the funds.

“What we need to be clear about is that there is no risk that has been taken away from the banks in this package so banks have to ensure that they take due diligence, they carry out their enhanced credit assessments before the money can be dispersed. So, the issue of risk is still on the banks’ balance sheet so they have to protect their balance sheets by making sure that they follow the procedure on their credit assessment before advancing any money to would-be borrowers. So, it will be treated just like any normal kind of credit application because on one hand, banks have to cover their positions to manage their risks, whilst at the same time when they are borrowing from the central bank, they are also pledging some form of collateral towards that borrowing. So, at the end of the day, banks will have to follow the rules to the letter to ensure that they protect their own balance sheets because the risk is being carried by the banks and not the central bank in this framework,” Mwanza explained.

“They cannot water-down the requirement to demand collateral, that one is non-negotiable because they have got the responsibility to protect their balance sheet. And if you see, they are not just getting money for free, that money is being borrowed at an interest rate that has to be paid back, that money is being borrowed on the basis of collateral and there are various forms of collateral, which are well highlighted in the terms and conditions. So, when you look at it from that perspective, as a banker, the prudence is to ensure that they follow their credit and lending rules to the letter to ensure that they don’t water-down their own balance sheets, that’s key, but also, the lending is not just restricted to the big corporates, it involves any other business, which is within that framework of those identified sectors.”

And he disclosed that banks were the wrong place to go to for SMEs, despite them needing financial support, they still posed a great risk that banks did not want on their balance sheet.

“So, those micro, small businesses, really, if they are looking to borrow from the banks, it’s a wrong place to get money from there because banks in this framework, the micro businesses, these who normally co-mingle their personal funding with business funding, there, we have a challenge. There are structural problems that all of us understand because we are talking about capacity, performance challenges, failure to distinguish business and personal business. So, for those, it’s a good discussion that they need to be helped, but out of those that have created good relationships with banks and they are in good standing, they will surely be helped if they need to be helped. So if the risk is extremely high in the micro, small business sector, the rationale would be to stay back because that’s not the risk you want to carry on your balance sheet. So, it’s not about just picking up each and every application for the sake of it, is the risk worth taking?” he added.

But Mwanza, a former Natsave managing director, applauded the BoZ for widening the scope of eligibility to Financial Service Providers that wouldn’t normally qualify to borrow from the Central Bank

“It’s good to recognise that they have widened the scope of eligibility from financial institution by including a grant that should come in from a principal shareholder. So, that would help those institutions that can provide guarantees from their shareholders as form of collateral the Bank of Zambia can admit. That becomes, now, a good opportunity for those shareholders, who would want to guarantee the borrowing that the financial institution would undertake and then, obviously, the choices in terms of who to give the money from a prudent lending perspective,” said Mwanza.

He, however, stressed that the loan facility was meant to help those that had been hard-hit by the COVID-19 pandemic and not those that were already in financial trouble before the virus outbreak.