THE Reserve Bank of Zimbabwe (RBZ) has ordered banks to conduct site visits to clients who have taken out loans to ensure the money is used for its intended purposes, among other stringent measures.
In a statement on Friday, RBZ governor John Mangudya said its Financial Intelligence Unit (FIU) had completed investigations on possible abuse of loan facilities by 15 entities and found that the majority were using business models based on arbitrage.
“They make significant profit margins by borrowing at concessionary terms, stocking and then selling their products in United States dollars or in Zimbabwe (ZW) dollars at inflated parallel market exchange rates, thus enabling them to easily pay off the loans from a portion of the proceeds, and start the borrowing cycle again,” Mangudya said referring to the FIU investigation findings.
“Most of these entities generate significant revenues, in either Zimbabwe dollars or US dollars or both, which are sufficient to cater for their working capital requirements. Instead of using own revenues, they opt to fund most of their working capital requirements from the concessionary loans.”
“Some of the entities investigated abuse their access to loans by “multi-dipping” across several banks. In one example, an entity concurrently accessed ZW$6,5 billion worth of loan facilities from 12 of the 16 banks. Many other entities would have loan facilities running simultaneously at five or more banks”.
The FIU revealed instances 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 instances where a holding entity, with little or no operations of its own would borrow heavily from subsidiaries, who themselves would be accessing similar cheaper loan facilities directly from the banks.
“Such arrangements are a form of abuse of the financial system for material benefit through taking advantage of cheaper borrowing and repaying when exchange rates have been depreciated.
“In some cases, loans were accessed as working capital, but diverted to third party entities for purposes of funding purchases of foreign exchange on the auction on behalf of the funding entities,” he said.
In response, effective from July 1, Mangudya said no bank shall extend a loan to an entity or individual at an interest rate below the prevailing bank policy rate.
“Banks shall implement appropriate due diligence measures to ensure that borrowing by holding entities on behalf of their subsidiaries are properly justified and that the loans are used strictly for the intended purpose. Banks shall implement similar measures in the case where an entity borrows on behalf of an associated entity,” he said.
“Banks shall also — (a) ensure effective credit risk management, including loan monitoring and enforcement of loan covenants, client visits and other measures to ensure that borrowings are used for the intended purposes; and (b) ensure compliance with the prescribed prudential lending limits provided under the Banking Regulations SI 205 of 2000, and more particularly that: the aggregate of loans and advances outstanding at any time or any single obligor shall not exceed 25% of a banking institution’s capital base, and the aggregate of loans and advances outstanding at any time to any corporate group shall not exceed 75% of a banking institution’s capital base or 25% to any single member of such corporate group.”
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 foreign exchange parallel market and to take punitive action when abuses are identified.