The recent approval given to commercial banks by the Central Bank of Nigeria (CBN) to write off bad loans for which they had already made provision in their 2016 balance sheets should be seen for what it is intended to achieve: to clean up Non-performing Loans (NPLs) in their books; ensure accounting accuracy and create tax savings. In that regard, the banks should not see the reprieve as an incentive to accumulate more debts. Rather, it should be regarded as a timely measure designed to help them navigate through the prevailing economic and financial challenges.
The approval followed a letter written by Deposit Money Banks, urging the CBN to allow them remove Non-Performing Loans from their balance sheets for one year. The apex bank granted their request. It will, however, only apply until the end of this year, according to the approval letter dated July 28, and signed by Director Banking Supervision at the CBN, Mr. Tokunbo Martins.
The CBN letter acknowledged the request by the banks to amend relevant sections of the Prudential Guidelines, specifically section 3.21 (a), which mandates commercial banks to retain bad loans that have been fully provided for in their records for a period of one year before they can be written off. However, the CBN said it had no intention to repeal the guideline but was predisposed, in view of the current macro-economic challenges, to grant a one-off forbearance for the current year, 2016.
Taken together, the approval by CBN should be seen as a temporary ‘bailout’ and, indeed, a ‘window-dressing’ that will make the banks’ books look better in the short-term. Writing off the banks’ non-performing loans may increase the rate of lending, which is currently hampered by the recent increase of the Monetary Policy Rate from 12 to 14 per cent by the CBN.
It is important for the commercial banks to guard against unbridled granting of loans to customers. They should keep their eyes on the ball to avoid incurring fresh bad debts.
For some time now, pressure has been mounting on banks whose loan books have been adversely affected by the shrinking economy, the downward spiral of the naira, foreign exchange shortages and the upsurge in cost of business. This is mainly as a result of the persistent slump in crude oil prices in the international market.
The situation was worsened by the withdrawal of government funds from commercial banks following the implementation of the policy on Treasury Single Account (TSA). The increase in interest rates also worsened the situation for the banks.
Therefore, the approval granted the banks to write off NPLs is like sunshine after a storm. In recent years, the banks have had a high volume of bad loans in their portfolios. For instance, NPLs are projected to increase to 12.5 percent of total loans this year, up from CBN’s limit of five percent at the end of last year.This was after the banking sector groaned under the hangover from oil industry credit boom that ended abruptly in 2015, according to Augusto & Co, a leading rating agency in the country.
We are also aware of the 2015 Annual Report by the Nigeria Deposit Insurance Corporation (NDIC), which indicated a staggering 82.87 percent increase in NPLs of commercial banks in the country, to N648.8 billion, up from N354.34bn recorded in 2014. Many of the affected banks reported loan losses of between 239 percent and 449 percent.
These disclosures by NDIC highlight the need for better corporate governance in the banking sector. It is only sensible that the banks carry out a thorough revaluation of their loan processes because bad loans are dangerous to the solvency of the banks and the economy in general. Last year, the global rating agency, FITCH, warned that Nigerian banks could run into stormy weather because of their exposure to bad loans and the sluggish economy.
The bottom line is that the banks should more circumspect about the loans they give. The reprieve by the CBN has come at a crucial time when many banks have been filing for late disclosure of their financial statements. The fact is that when bad loans are written off, banks tend to present a better financial statement, while high NPLs increase tax liability.
The half-year statement of accounts released by some banks show that they posted low profit before taxation and high ratio of NPLs, ranging between nine percent and 12 percent. This is bad for the economy and even worse for the banks’ survival.
This has prompted Assets Management Corporation of Nigeria (AMCON), set up in 2010 to absorb bad loans of the banks during the global economic meltdown, to say that it will no longer be buying the banks’ toxic loans, but will from now focus on the recovery of the loans already advanced by the banks to their customers.
Overall, we urge the banks to bear in mind that the CBN has made it clear that henceforth, NPLs in their balance sheets will be used to assess their liquidity. This is partly why they asked for extension in presenting their financial statements. Now that the request has been granted, the banks should not abuse the privilege. They should see it as a breathe of fresh air granted them to put their books in order.