THE Central Bank of Nigeria Financial System Stability (FSS) report on the commercial banking industry for the month of February raised concerns over the declining assets of Nigerian banks. While this may not necessarily call for panic or fears over their insolvency, it clearly indicates the need for a more thoughtful approach to strengthening the fundamentals of the banks in the critical areas of assets and capital planning, adequacy and generation.
According to the report released a few weeks ago, the total assets and liabilities of the deposit money banks (DMBs) in the country declined to N32.1trillion, down from N32.29trn in January 2016. The loss in value amounts to N172.2bn.
The decline in the assets of the banks is attributed to the economic recession, increasing non-performing loans (NPLs) and declining capital the adequacy. The CBN report also revealed that within the period under review, the banks sourced funds mainly by drawing down their reserves with the apex bank, in addition to frequent patronage of the CBN Standing Lending Facility. This is a mechanism that the CBN uses to lend money to primary dealers.? It provides the banks access to funds to satisfy reserve requirements using the overnight lending market.
Besides, the CBN report also raised concern on the liquidity of the banks when it said that the funds that they sourced were largely not used to extend credit to the real sector operators in the economy, but for the patronage of the Federal Government’s securities at higher yields. The report also lamented that while depositors earn “peanuts” on their deposits, the banks rip off their customers with high interest rates.
Even if the CBN report is not an outright indictment of the banking industry, it mirrors the state of affairs in the banks, as the FSS gauges the soundness of the banks through indicators such as assets quality, capital and income adequacy, and the ratio of non-performing loans, among others.
In almost all these key indices, our banks did not perform well. The decline in total assets, as highlighted in the February report, is a clear evidence of this. Also, the banks’ NPLs have been increasing steadily in recent years. For instance, the total NPLs in 2016 was put at N2.08trn in the CBN FSS report. Also, in the Nigeria Deposit Insurance Corporation (NDIC) Annual Report 2015, banks’ NPLs increased to N648.8bn from N354.34bn in 2014, an astonishing increase of 82.87 percent. As a result, some banks last year reported losses of between 239 percent and 449 percent.
No doubt, bad loans are dangerous to the health of banks. Last year, Fitch, a global rating agency, had cause to warn that Nigerian banks might run into stormy weather because of their over-exposure to bad loans. As experts have repeatedly cautioned, high NPLs threaten the solvency of the banks and the economy in general. Effective control of the lending function is vital to the profitability and solvency of every bank. Lack of this is already affecting the profitability of the banks, as their profits after tax in 2016 show. Only recently, we called on the banks to strengthen their assets portfolio and revalue their loan processes, as the nation cannot afford another incidence of bank failure amidst the present economic recession. Failures often result from a loss of public confidence in the banking system. Maintaining that confidence is one of the primary functions of banks.
We also urge the CBN to review the banks’ capital adequacy requirements. This has become expedient in view of the apex bank’s responsibility of protecting depositors’ funds and the safety of the banking system. Indeed, capital adequacy has been a primary concern of regulators for many years. It is a fundamental and vital modern banking requirement. It cannot be faulted that adequate capital enables the banks to meet their obligations to their stakeholders. While it is critical to the continued existence of the banks, it has become a major concern and topic of discussion and controversy.
Overall, we think both the regulators and the banks need to share the blame for the current state of the industry. The CBN, in particular, needs to do much more in its supervisory and monitoring roles.