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N2trn Non-Performing Loans and Impact On Banks’ Liquidity

With over N2 trillion recorded as non-performing loans in the banking industry by December 2016 analysts have raised serious concern to prevent liquidity crisis, even as the Central Bank of Nigeria, CBN, says NPL still manageable range.

It is no longer news that the balance sheets of many banks operating in the country are seriously affected by huge non-performing loans, NPLs, but what May be news however are efforts by regulators and operators in the financial sector to arrest this ugly trend.

The challenging economic situation in the country according to analysts has contributed to the huge banking industry’s non-performing loans hitting the N2 trillion mark in December 2016, the Central Bank of Nigeria’s Financial System Stability, FSS, Report showed.

The Report stated that the ratios of non-performing loans increased from 11.7 per cent in June to 14 per cent in December 2016.

The FSS report said in parts, “Commercial banks in the country experienced deterioration in assets quality at end-December 2016. The deterioration in asset quality was largely attributed to the rising inflationary trend, negative GDP growth, and the depreciation of the naira.

“The  ratio  of  regulatory  capital  to  risk  weighted  assets  decreased  by  0.8 percentage points  to 13.9 per cent at end-December 2016, compared to 14.7 per cent at end-June 2016.

“Similarly, the ratio of Tier-1 capital to risk weighted assets declined by 0.9 percentage points to 12.9 per cent at end-December 2016 from 13.8 per cent at end-June 2016.  Despite the marginal decrease, the ratios remained above the Basel minimum threshold.”

According to the Report, the ratio of non-interest expenses to gross income increased to 63.8 per cent at end-December 2016 from 54.6 per cent recorded in the preceding half of the year, while return on assets declined by 1.0 percentage points to 1.3 per cent at end-December 2016 from 2.3 per cent recorded at end-June 2016

The banking sector’s credit to the private sector grew by 19.37 per cent to N22.34trn as at the end of December 2016, compared with the growth of 14.44 per cent and 3.29 per cent recorded at end of June 2016 and the corresponding period of 2015, respectively.

As at the end of December 2016, loans to the oil and gas sector as credit to that sector grew from N4.51trn, to N4.89trn.

In the assessment of the balance sheets of some banks, mid last year the Central Bank of Nigeria, CBN, had observed that as at the end of December 2016, energy companies in the country are indebted to commercial banks to the tune of about N4.5 trillion. This constituted 30.02 per cent of the gross loan portfolio of the banking system.

A breakdown of the figures by the CBN indicated that in the industrial segment, oil and gas firms’ aggregate credit stood at N2.153 trillion as at March 2015, compared to N2.3 trillion in February 2015 and N2.047 trillion as at December 2014.

It was therefore not surprising to many market watchers that the overexposure of banks to the oil and gas sector owing to shocks of the global oil prices affected their bottom line substantially and also had a tremendous effect on their loan portfolio.

A NPL is one which interest is overdue and full collection of principal is uncertain. It is either in default or close to being in default.

Speaking in May 2015  in Lagos at the third National Credit Reporting Conference organized by the Credit Bureau Association of Nigeria, CBAN, CBN Governor, Godwin Emefiele  had noted  that  the state of bad loans in the sector implies that efforts needed to be doubled in credit information sharing to stem this “worrisome” trend.

According to him the apex bank had made it mandatory for all financial institutions to have data exchange agreements with at least two credit bureaux. “All banks are required to obtain credit report from at least two credit bureaux before granting any facility to their customers whilst quarterly portfolio checks must also be carried out to enable them determine borrowers’ current exposure to the financial system,” Emefiele said.

CBAN Chairman Mrs. Jameelah Sharrieff-Ayedun said the group will continuously project the use of credit information as a viable tool for access to finance. She said credit bureau remains critical in nation-building as it ensures that only people with integrity get access to credit. Credit bureaux are key in stimulating economic growth through the provision of critical risk management and fraud prevention services to the financial services sector, Mrs Sharrieff-Ayedun said.

However former CBN Director, Banking Supervision, Mrs Tokunboh Martins, who is currently in Director OFIS Department had at a Bankers Committee meeting in Lagos, October, 2016  said even though the NPLs in banks have risen but that they are in an acceptable region.

According to her the report that some banks were undercapitalized was untrue and quite misleading.

“As Director of Banking Supervision in the CBN I can tell you that the report that seven banks are undercapitalized is not true. That is not to say that the banking sector is not feeling the headwinds. The non-performing loan, NPL ratio at 11 per cent is not strange and that is not what we should focus on now.

“What we should focus on now is whether the banks have very strong capital buffers and whether they have very huge capacity to generate income and I think the banks do”, she had said.

She said other jurisdictions that are going through what we are going through some of them have their NPLs as high as 15 per cent, 25 per cents and more.

CBN Acting Director Corporate Communications, Mr. Isaac Okoroafor said loans are parts of business, and should not be seen as a sign of weakness in the country’s banking industry.

“Non-performing loans occur, when economic situation is not very good, especially now that oil price is plummeting. But we have it as a duty to ensure that the level will not threaten the existence of banks because of failing oil price,” he explained.

President, Association of Banks, Insurance and Financial Institution, ASBIFI, Sunday Salako said the rising bank debt is a result of current economic meltdown affecting businesses.

“Many people will borrow to import certain things with the hope to sell, make gains and return bank’s money. But the thing is that they have imported and people are not buying; some have produced, and cannot sell,” he said.

However many analysts have blamed the rising non-performing loans, the connivance of bankers and some highly placed Nigerians. According to an analyst who does not want to be named loans were given to some powerful Nigerians considered as “sacred cows” without tangible and verified collateral. He said some of these highly placed Nigerians obtained loans with the mindset of not paying.

“They knew from day one that they wouldn’t pay because of internal connivance. These debtors had given part of the loan as gratification to bank staff in order to circumvent the procedure. That is why many of them have no tangible collateral and there is no way you can force them to pay”, he noted.

On the mode of recovering the loans many have said that the ‘naming and shaming’aproach has been counter-productive as many banks into litigation as many of t he personalities whose names were published may have divested from the companies alongside which their names appeared.

 According to a financial analyst, Emmanuel Ibeh, the prevailing economic challenges has made it  obvious that banks have to look at more creative ways to grow their bottom line.

“You know in the recent past, banks had to rely heavily on FX-related businesses to generate the highest deposits. However, what they can do now is to try to add value to customers beyond what they used to do”, he said.He also said banks need to give more value in terms of products and services to customers.

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