The Bank of Uganda has released a report indicating that banks are concerned about a potential increase in the rate of loan defaults. This concern arises from the recently enacted Anti-Homosexuality Act, which may lead to job losses, ultimately affecting the number of non-performing loans.
The Bank Lending Survey Report for the fourth quarter of 2022/23 highlights the projection of an increase in default rates, particularly on household loans. This projection is primarily due to the anticipated negative impact of the Anti-Homosexuality Act on funding for non-governmental organizations (NGOs).
According to the report, banks are concerned that the tightening of funding to NGOs by international donors in response to the Anti-Homosexuality Act could result in job losses, thereby increasing the level of non-performing loans. The report does not explicitly mention the legislation but alludes to the Anti-Homosexuality Act, which has faced backlash from international funders.
In addition to the potential job losses related to NGO funding, the report identifies other factors contributing to the risk of increased non-performing loans. These factors include delayed payments to contractors by the government, the adverse effects of the Russia-Ukraine conflict on economic recovery, and slow progress in recovering from the impact of the COVID-19 pandemic.
The report highlights that banks expect household loan defaults to increase significantly, potentially reaching 26.2 percent on a net basis, compared to the previous survey’s recorded rate of 11.6 percent. Overall, default rates for both enterprises and households are expected to stand at 21.7 percent, with a net increase in default projected for firm-sized and long-term loans, while the default rate for short-term loans is anticipated to decrease on a net basis.
Additionally, banks plan to tighten terms and conditions for lending to riskier customers but may relax terms for prime borrowers. This adjustment is due to factors such as the high cost of funding, high interest rates to compensate for risk, and delayed payments from contractors, which affect average and riskier loans. On the other hand, easing terms for prime borrowers is driven by the need to retain customers and remain competitive in the market.
The report also notes that most banks expect to maintain non-price terms and conditions, with a bias towards tightening, except for loan size and maturity, which are expected to ease on a net basis. This easing is attributed to liquidity challenges, diversion of contract proceeds, and performance failures, leading to a tightening of collateral requirements.
