28 Nov 2024
Unified NPL Trigger Ratio and Enhanced Early Warning Systems Set to Bolster Financial Stability
The Bank of Namibia (BoN) has rolled out enhanced supervisory measures aimed at bolstering the stability and resilience of the country’s banking sector.
The measures, aligned with the Basel Core Principles, include an updated Early Warning System (EWS) and Prompt Corrective Action (PCA) frameworks. These tools are designed to proactively identify and address potential risks before they escalate.
A key update is the implementation of a unified Non-Performing Loans (NPL) trigger ratio of 6%, replacing the previous dual metrics system.
“The integration of the Early Warning System and Prompt Corrective Action frameworks underscores our proactive approach to supervision, ensuring the banking sector remains stable, resilient, and prepared to absorb risks from evolving macroeconomic conditions,” said Naufiku Hamunime, Acting Director of Strategic Communications and International Relations at BoN.
The changes come in response to the post-COVID-19 economic environment, which has seen NPL ratios exceed previous thresholds.
According to reverse stress testing conducted by the central bank, Namibia’s banking sector remains robust. The tests revealed that banks could withstand significant increases in NPLs without breaching capital adequacy requirements.
“The 6.0% trigger ratio has been validated through reverse stress testing conducted across the banking sector. The testing revealed that banks’ capital adequacy remains robust, with NPL ratios needing to reach significantly higher levels before breaching regulatory capital thresholds,” Hamunime said.
As of September 2024, Namibia’s NPL ratios remain below critical levels, underscoring the soundness of its banking system.
Still, Hamunime noted that banks approaching the 6% threshold would face intensified oversight. Measures for those breaching the limit could include restrictions on dividend payments and capital reinforcement requirements.
She stressed the importance of strong governance and robust risk management to maintain financial stability amid shifting economic conditions.
The integration of the EWS and PCA frameworks, she added, reflects BoN’s commitment to safeguarding a resilient banking sector capable of navigating evolving macroeconomic challenges.