Assessing the Impact of Loan Restructuring on the Quality of Bank Assets in Rwanda

Abstract

The main objective of this paper is to assess the impact of loan restructuring on the quality of bank assets in Rwanda. We use quarterly data covering the period 2012Q1–2022Q1 in a sample of 14 banks and employ a Bias-Corrected Generalized Method of Moments to estimate this relationship. The major findings point to the fact that restructured loans, non-interest income, and return on equity are key factors that lower credit risk and improve the quality of banks’ assets, while the ratio of total deposits to total assets, the ratio of loan loss provisions and bank size increase credit risk and diminish the quality of bank assets. The results are not robust to the inclusion of the dummy variable for 2020. However, other variables remain broadly in line with the main results. Given the results, we propose several policy recommendations, including a thorough assessment of the ability of borrowers to meet the restructured terms before the approval of the loan restructuring by focusing on the creditworthiness of borrowers, loan restructuring should target creditworthy borrowers facing transitory financial difficulties rather than those with unsustainable debt burdens, and strengthening monitoring mechanisms to track the performance of restructured loans post-approval through regular follow-up to identify early warning signs of deterioration and allow for timely intervention to mitigate losses.