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Non-performing loans could impact economy

August 8, 2020 1:30 pm
Reserve Bank Governor Ali has stressed that non-performing loans are the most significant source of credit risk to a bank. [File Photo]

Reserve Bank Governor Ariff Ali has stressed that non-performing loans are the most significant source of credit risk to a bank.

Ali explains that this can create major losses if not mitigated adequately through provisioning, and additional capital.

The Governor says that these non-performing loans could impact financial stability moving forward.

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He clarified that when loans given by banks are not paid back by borrowers in the time and conditions agreed to, they become non-performing.

Ali stresses that banks are in the business of giving out loans, mostly from the deposits they receive but also from the capital provided by their shareholders.

He says when a big bank fails, or when a number of medium to small-sized banks fail due to non-performing loans, the stability of the financial system is weakened and if not contained, can lead to a financial crisis.

The RBF Governor says the flow-on effects are detrimental as the economy weakens, with negative impacts in the general lending environment, the payment system, the circulation of currency, and also the reputation of the financial system.

He says this is why maintaining the safety and soundness of individual financial institutions like banks, and the stability of the overall financial system is crucial.

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