Brief Note

March 2018

Bank of Tanzania Circular on NPLs

In this industry update, we provide an account of the Bank of Tanzania's (the BOT) Circular
No. FA.178/461/01/02 dated 19 February 2018 (the Circular) titled "Measures to Increase
Credit to Private Sector and Contain Non-Performing Loans".

The introduction of this Circular comes as a result of attempts to curb the general slow-down in
private sector credit growth and the increasing number of non-performing loans (NPLs). The
aim of this Circular is to provide guidance to banks and financial institutions on how to tackle
the rising number of NPLs through specific strategies that banks and financial institutions
would have to develop, as well as provide information on regulatory measures and reliefs that
the banks and financial institutions can apply to NPLs. There is also a quarterly reporting
requirement that banks and financial institutions will have to comply with. This report (format to
be provided by the BOT) will inform the BOT on the banks' and financial institutions’ progress
in reducing NPLs and increasing good quality credit to the economy.

The banking industry benchmark for NPLs is set at 5 per cent, however, in the third quarter of
2017, unaudited accounts for 19 banks and financial institutions indicated that NPLs ranged
between 4 per cent and 51 per cent, significantly higher than the benchmark. A higher
percentage of NPLs means that banks and financial institutions make less profit because of the
difficulties they have in collecting interest and principal on the loans. This also results in banks
and financial institutions curtailing lending.

The BOT has recently revoked licences of several banks due to unsustainable NPL ratios while
other banks with high NPLs have been given a 6 month period within which to improve their
credit-granting processes.

Recommended strategies:

The BOT has recommended the following minimum strategies to limit NPLs:
a) Reduce NPL ratio to no more than 5 per cent by setting strategic objectives with time
limits;
b) Set up a permanent recovery function with predefined roles and responsibilities;
c) Separation of duties in the credit department with independent units performing credit
processing, sanctioning, monitoring, administration, and recovery and enforcement;
d) Involve top management for high risk cases and some recovery decisions;
e) Guidance and modalities for the following:
i. outsourcing of collection specialist
ii. management reporting
iii. regulatory reporting to BOT (new quarterly requirement) as well as a progress
update within 2 months of the Circular
f) Establishment of options and key performance indicators to reduce and aid recovery of
NPLs in the short and long-term basis;
g) Establish NPL policies including:
i. Arrears Management Policy
ii. Debt Recovery Policy
iii. NPLs Classification and Provisioning Policy
iv. Syndicated and Multi-Banked Distressed NPL Policy
v. Collateral Management, Valuation and Reporting Policy
vi. Early Warning Policy

.
 h) Reassess credit processes etc. to ensure lending takes place systematically, identify
gaps and cure defects in internal processes.

Regulatory measures and reliefs

The BOT has waived certain provisions of the Banking and Financial Institutions (Management
of Risk Assets) Regulations 2014 (the Banking MRA Regulations) in order to provide reliefs
which hopefully aid the reduction of NPLs in the industry. The reliefs are granted for a tenure of
up to three years up to 31 December 2020.

1. Restructuring NPLs
The BOT has now permitted banks to restructure NPLs up to 4 times. This is an increase from
the previous limit of 2 times which was in accordance with the Banking MRA Regulations. In
order to take advantage of this waiver, banks and financial institutions will have to demonstrate
that borrowers have a good track record of repayment but lack working capital to support their
business, only apply this measure for borrowers whose businesses have been affected by
external factors as opposed to their characters or overexposure, and maintain a list of NPLs
restructured more than twice.

It appears that the BOT requires banks and financial institutions to play a larger role by
identifying exactly why a borrower has failed to meet repayment deadlines. Moreover, the
banks / financial institutions will have to weed out borrowers who have a good repayment
record but also limited working capital which would be difficult to demonstrate in order to take
advantage of this waiver of Regulation 7 (5) of the Banking MRA Regulations.

2. Waiver of interest and charges

Banks and financial institutions may “roll-over, renew or extend overdraft facilities that have no
hard-core elements without considering the amount of interest and charges outstanding”, since
the BOT has waived Regulation 7 (2) of the Banking MRA Regulations.

There are a number of conditions associated with taking advantage of this waiver including:
a) Application to borrowers whose overdraft facilities have been converted into term loans
and they have begun paying through repayment schedules;
b) NPLs are due to financial difficulties of a temporary nature and after a defined period
the borrower will be able to repay on the revised terms;
c) There is no other alternative apart from capitalisation of interest and charges is the only
available option;
d) This option will only be exercised to the same customer once;
e) Maintain records of credit facilities converted into term loans indicating amount of
capitalised interest and charges and the reasons for restructuring; and
f) Cannot be applied to NPLs under which there is litigation regarding recovery from
collateral or written-off loans.

Under this measure banks and financial institutions may establish their own percentages of
arrears to be capitalised as compared to the principal and interest.

3. Upgrading of credit accommodation

Banks and financial institutions may now upgrade term loans to a better classification category
once the borrower has paid two consecutive loan instalments as the BOT has waived
compliance with Regulation 7 (4) of the Banking MRA Regulations. Previously, under the
Banking MRA Regulations, banks and financial institutions could only upgrade term loans once
four consecutive instalments had been paid.
 4. Withdrawal of write-off credit accommodation circular
The BOT had issued Circular No. FA.56/470/01/VOLI/50 dated 10 April 2015 with the title
"Charge Off Credit Accommodations" which allowed banks and financial institutions to write-off
credit accommodation that remained in the loss category for more than twelve consecutive
quarters. This has now been withdrawn and compliance with Regulation 4 of the Banking MRA
Regulations is required. Regulation 4 of the Banking MRA Regulations states that “banks and
financial institutions are required to write-off credit accommodations (such as non-performing
loans) and other risk assets that have remained in the loss category for more than four
consecutive quarters”.

This will allow the number and ratio of NPLs to reduce significantly as many loans will now be
written off if they have not been paid back in a year or 4 consecutive quarters.
The introduction of these measures will be useful in tackling the rising number of NPLs in the
industry as well as encouraging banks and financial institutions to be more diligent and
proactive as they will have to abide by reporting requirements set by the BOT.

We hope this information has been useful. Should you require further information, please do
not hesitate to contact us.
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from acting as a result of material contained in this summary. Further advice should be taken
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for loss occasioned to any person acting or refraining from acting as a result of material
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Contact us

Tenda Msinjili
Senior Associate
Direct Dial: + 255 76 898 3016
Tenda.Msinjili@clydeco.com

Michaela Marandu
Senior Associate
Direct Dial +255 76 898 3024
Michaela.Marandu@clydeco.com

Amreen Ayub
Associate
Direct Dial +255 76 898 3032
Amreen.Ayub@clydeco.com

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