/ 13 September 2013

The IDC’s bad loans are at historic levels

IDC chief financial officer Gert Gouws
IDC chief financial officer Gert Gouws (centre) denies being under political pressure. (Denzil Maregele/Gallo)

The impairments and write-offs amassed by the Industrial ­Development ­Corporation are at the highest level in the institution’s 73 years of existence and while the state-owned entity admits it is uncomfortable with the figures, it denies they are a result of political pressure to fund ventures it normally wouldn’t.

In its recently released integrated report, the IDC revealed that its impairment ratio had climbed from 15.1% of the entire portfolio in 2009 to 18.2% in March 2013.

“The impairment and write-offs charge to the income statement of R2.26-billion for the year ended March 31 2013 was 38% higher compared to financial year 2012,” the report said.

“I would certainly not say we are comfortable with this kind of impairment. We believe the impairment figures are high,” the IDC’s chief ­financial officer, Gert Gouws, told the Mail & Guardian.

Although not the most substantial loss in terms of the actual value of the loan book, the IDC’s loans to the textile and clothing industry took an impairment hit of 60%, compared with impairments in other areas such as green industries (1%), agro-industries (14%), venture ­capital (30%), and mining and minerals ­beneficiation (11%).

The textile industry has suffered tremendously from the onslaught of Chinese imports and is a sector in which the government has strived to avoid a “bloodbath” in terms of job losses.

'No political pressure'
But Gouws denied there was political pressure to support projects which the IDC would not otherwise have done.

“I can honestly say there is no pressure from the IDC to invest in projects which would not make logical business sense.”

He said it would be illogical and irresponsible to inject money into a company that would not work, but “naturally we do make mistakes, and not all projects work out the way we envisage”.

Gouws said the impairment was a result of pressure on the IDC’s target market and extraordinary pressure from a commodities point of view.

“A large part of our book was exposed to companies directly or indirectly affected by those industries,” he said.

The IDC’s impairment ratio compared to traditional financiers is very high indeed. As recorded in the Reserve Bank’s banking supervision report for 2012, the South African banking sector’s ratio of impaired advances to gross loans and advances decreased from 4.7% at December 31 2011 to 4.1% at December 31 2012.

Assuming higher levels of risk
But development financiers, unlike traditional banks, are expected to assume higher levels of risk.

“We need to intervene when traditional financiers would not,” Gouws said “If a transaction is fundable by a bank, the IDC would usually withdraw.”

Sometimes projects will be partially funded by banks, which take on the secured debt, while IDC will provide higher-risk mezzanine funding.

Gerhard Coetzee, a professor at the Centre for Inclusive Banking in Africa at the University of Pretoria, said an impairment ratio was a function of the risk a development funding institution was willing to accept in the quest to take on the more risky projects ignored by the private sector, given that the development impact and long-term benefits justified it. However, it could also be a function of inefficiency or targeted finance.

But comparing one developmental institute to another would not be a fair comparison.

“It is important to do a like-for-like comparison, looking at the development objectives of countries, before we can infer from comparisons,” Coetzee said. “For example, the Development Bank of Southern Africa has nonperforming loans at 5% of its portfolio, but very different clients, objectives and projects.”

Looking to reduce the impairment ratio
However by the IDC’s own standards the 18.2% is coming dangerously close to a board-approved impairment threshold of 20%.

Thought to be the oldest development-finance institution in the world, the corporation has a long history of sustaining itself and not requiring recapitalisation from the government.

Asked whether, if the impairment rate continued to rise, the IDC would eventually require a hand out from the treasury’s coffers, Gouws said that was not the intention.

“We had envisaged the turning point would have been 18.2% again last year … [but] we are working very hard to make sure it does not increase further.”

He said the corporation’s medium-to-long-term goal, set last year, was to reduce the impairment ratio to 15% and the IDC expected to meet this goal in four years by ensuring its book grows more quickly than its impairments.

The balance sheet shows total equity of R96.9-billion and the IDC, “remains extraordinarily strong and well-capitalised”, Gouws said.