The Bank of Namibia (BON)has reiterated its commitment to ensuring the stability and resilience of the banking sector by employing proactive and effective micro-prudential supervisory measures. Guided by the Basel Core Principles (BCPs), particularly Principle 11 on Corrective and Sanctioning Powers of Supervisors, the central bank’s Banking Supervision Department continues to enhance its ability to address unsafe or unsound practices that may pose risks to individual banks or the broader banking system. 

In line with these principles, the central bank noted it implemented Prompt Corrective Action (PCA) Procedures, supported by the Early Warning System (EWS) framework. 

“Together, these tools are designed to identify and address potential risks and weaknesses at the earliest possible stage, ensuring timely and effective corrective action. The EWS is particularly crucial in monitoring banks’ quarterly performance and detecting early signs of stress, enabling interventions such as informal monitoring before formal PCA measures are enacted,” reads a BoN statement. 

Moreover, to enhance credit risk management, the central bank initially employed two sets of regulatory trigger ratios; one for business-as-usual conditions, and another for stressed environments. However, following technical guidance from the International Monetary Fund (IMF), these triggers were consolidated into a single Non-Performing Loans (NPL) trigger ratio of 6.0%. 

The central bank stated: “This decision reflected post-Covid-19 conditions, where banks consistently operated above the 4.0% trigger due to elevated nonperforming loan (NPL) levels.”

BoN added that the 6.0% trigger ratio has been validated through reverse stress testing conducted across the banking sector. The testing revealed that banks’ capital public adequacy remains robust, with NPL ratios needing to reach significantly higher levels before breaching regulatory capital thresholds. 

Furthermore, as of the September 2024 quarter, observed NPL ratios remained well below these thresholds, affirming the financial soundness and stability of the banking sector. 

“To further safeguard the system, supervisory actions will intensify as banks approach higher risk thresholds. When an institution’s NPL ratio moves into the upper 5% band, supervisors engage proactively with management to evaluate risks, and ensure effective mitigation strategies,” the central bank stated. 

However, should a bank’s NPL ratio escalate towards the 6% trigger or beyond, supervisory measures will progress to formal actions, which may include: imposing higher capital requirements; restricting dividend payouts; Limiting business expansion activities; requiring commitment letters from the board of directors; or issuing cease-and-desist orders.  

Meanwhile, the central bank emphasised the importance of strong governance and risk management practices within banks as the cornerstone of financial and operational resilience. 

“The integration of the EWS and PCA frameworks underscores our proactive approach to supervision, ensuring the banking sector remains stable, resilient and prepared to absorb risks from evolving macroeconomic conditions,” BoN stated.