Understanding the ZAMCO business model

here has been a lot of talk about the Zimbabwe Asset Management Company (Zamco) lately, particularly after the appearance of the Reserve Bank of Zimbabwe governor, John Mangudya, before the Parliamentary Portfolio Committee on Public Accounts. It is with this in mind that I decided to further understand exactly what the objectives and operations of Zamco are so that we may all debate issues from an informed position.

Firstly, we need to understand the key purpose of Zamco. Zamco was established in 2014 by the RBZ, with the technical assistance of the IMF in order not only to address the emerging crisis in the banking sector from non-performing loans (NPLs), but to also ensure that Zamco would be established in line with best international practice. The NPLs ratio had risen 20,45%, which was much higher than the internationally acceptable threshold of 5%. This is not a first as similar structures to deal with NPLs have been successfully set up internationally, for example, in Nigeria, Malaysia, China, Indonesia, Thailand, Sweden, Ireland and the United States, among others. Where NPLs are too high, this poses a systemic risk to the banking sector and the economy as a whole because banks are not able to collect loans granted, and this puts a squeeze on their lending operations.

It soon becomes a serious risk factor on viability and access to credit for both the banks and borrowers. High NPLs, therefore, ultimately result in the deterioration of the country’s credit rating, lack of access to credit lines and increased borrowing costs. This further stifles commerce and economic growth. We must remember that these NPLs were loans granted by banks in their normal course of business and were not part of some grand scheme by the RBZ or the government to write-off debts of some politicians as has been insinuated in some circles. Nothing could be further from the truth! The process involved Zamco acquiring NPLs from banks on a willing-buyer willing-seller basis. The banks themselves identified the NPLs which were dragging or spoiling their balance sheets and posing risks, Zamco then “bought” these assets, , for an agreed consideration normally below book-value, which was then financed by 10-16 year-term Treasury Bills.

This means the banks effectively replaced risky or dead assets, which were most unlikely to be recovered from their balance sheets, with more secure and less risky assets in the form of TBs, thus putting the banks in a better position. This was a Zamco mandate: to assist banks in sanitising their balance sheets so that they do not fold up as a result of high exposure to NPLs. It must be noted that a number of banks which closed during the period 2003 to 2005 were partly as a result of high exposure to NPLs, particularly insider loans. By taking over NPLs from the banking sector. Zamco, therefore, prevented the calamity which happened in 2003-2005 from recurring. The Zamco acquisitions helped to reduce the ratio of NPLs in the banking sector from a high of 20,45% in September 2014 to 6,62% as at December 31, 2018. As a matter of principle, Zamco does not acquire each and every NPL offered to it by the banks, but the NPL must meet set criteria first. These include security of mortgage bonds, no insider loans and underlying obligors must have recovery prospects; afterwhich due diligence credit assessment, collaterals valuation and loan pricing are performed. Note that this process of loan acquisition by Zamco had nothing to do with the borrower, it is an arrangement between the banks and Zamco. It is the bank that owns the asset, that is, the NPL and thus the decision to sell NPLs to Zamco rests with the bank alone and not the borrower. It is also important to note that these loans were not written off or forgiven, because those who owed the banks still owe to Zamco, whose responsibility becomes to eventually recover the loans. To achieve that, Zamco has several approaches.

After acquisition of the NPLs, which is the principal objective, Zamco, once it has taken over the loan, applies various resolution techniques to maximise recovery on these loans. This is the point where the borrowers come in, or in other words engagement with borrowers commences.

As part of resolving NPLs, Zamco assists those distressed companies with prospects for turn-around by restructuring their debts through, for example, reduction of interest rates and extension of the loan repayment period, thus reducing the immediate interest burden of the companies. Other resolution methods include; debt-to-equity conversion, debt-asset-swap, negotiated settlement at a discount, schemes of arrangements to restructure loans, disposal of NPLs to investors, foreclosure through forced sale of collateral and liquidations, among others. The point being that Zamco pursues what it deems to be the best, yet patient route to recover the debts owed. Debts are not written off or forgiven because they are now at Zamco. All things failing, Zamco remains with the option to take the necessary legal action to recover loans through foreclosures.

By statute, Zamco is a special purpose vehicle (SPV) with a specified shelf life of 10 years, meaning that by 2025, Zamco will wind up. This is the common procedure regarding all public asset management companies and is meant to prevent moral hazards in the banking sector.

The Minister of Finance also announced in the 2019 national budget statement that Zamco would no longer acquire new NPLs. As at December 31, 2018, Zamco was sitting on about $1,13 billion of NPLs and, according to its cheif executive Cosmas Kanhai, it has to date recovered $250 million, while it also managed to settle coupon payments of about $67 million from own, and resources without recourse to public funds. This is evidence that loans taken over by Zamco had to be repaid, thereby dismissing the notion that it was created to benefit certain sections of society. Every loan at Zamco has to be repaid and as indicated earlier, those that fail to repay will be foreclosed. The above, my patient readers, is the business model of Zamco. Now we can all debate matters arising, but at least we have the facts.

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Vince Musewe is an independent economist. He writes in his personal capacity.

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