Sour Agricultural Loans Magnify DBE Losses, Again

78 projects in Tigray reclassified as NPLs

Loans doled out to rain-dependent agricultural projects continue to haunt the Development Bank of Ethiopia (DBE) as its executives scramble to recover or write off bad credit from its books before the end of the fiscal year.

Agricultural credit accounts for 73 percent (5.15 billion birr) of the Bank’s 6.8 billion birr portfolio of non-performing loans (NPL). Manufacturing ventures account for the remainder.

A report presented to Parliament this week reveals that 44 percent of the Bank’s agricultural NPL portfolio is concentrated in farming ventures in Gambella, Benishangul-Gumuz, and Southwestern Ethiopia. Gambella alone accounts for more than two billion birr in NPLs, as investors there as well as in Benishangul have been forced to abandon their farms after receiving the credit.

These loans have been diverted to other businesses, according to DBE executives.

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No less than 76 percent of DBE’s disbursed loans have been written off as losses, while a further 11 percent are classified as ‘substandard.’ The Bank is keeping 4.35 billion birr in provisions for NPLs this year, down from 5.5 billion in 2020.

“If proper measures are taken on the NPLs of rain-based agricultural loans, DBE’s NPL ratio will drop significantly. As a sustainable solution, the Bank must use different mechanisms including write-offs to reduce agricultural NPLs and improve its asset quality,” reads the report presented to MPs this week.

DBE’s total NPL ratio stands at 7.78 percent. If agricultural NPLs are removed, the figure drops down to 3.73 percent. Although the ratio is still far from healthy, it is a considerable improvement on the nearly 51 percent figure reported five years ago.

“When we embarked on the reform five years ago, Parliament concluded that DBE could not be revitalized and was considering closing it down. Today, DBE is sound and liquid; better than commercial banks,” said Yohannes Ayalew (PhD), DBE president.

He told lawmakers the Bank is working to recover what agricultural NPLs it can or write them off if impossible before the end of the fiscal year in a few weeks’ time. He assured Parliament that the agricultural NPLs should not be cause for too much worry as the Bank has held provisions to compensate.

Yet, the report indicates that close to 120 projects have fallen into the NPL category over the first three quarters of the financial year. The projects have a combined value of 1.16 billion birr in financing from DBE.

Some 78 investment projects valued at 800 million birr have also been classified as NPLs over the same period, according to Yohannes.

“The projects are located in areas bordering Tigray Regional State. Investors could not resume operations because of a lack of access to the areas. We’ve reclassified 78 projects in Tigray as NPLs,” he said.

Out of DBE’s total NPL, 20 projects account for nearly two billion birr, of which 13 are in the ‘loss’ category. The companies include My Shoes and Leather Manufacturing Plc, Ayga Trade and Industry Plc, Hiwot Agricultural Mechanization Plc, MNS Manufacturing Plc, and Gizal Textile Plc, among others.

The Bank collected 1.43 billion birr through auctioning off the properties of seven companies that were unable to settle their debts. The list includes Etur Textile Plc, one of the failed Turkish investments in Ethiopia. The company’s assets fetched 1.18 billion birr at auction, slightly higher than the 1.13 billion birr floor price.

The Bank collected 11.7 billion birr in loan repayments over the first nine months of the financial year, achieving close to 92 percent of what its executives had targeted. They want to see its NPL ratio drop below the five percent threshold by the end of the month.