Of the many policies that the Central Bank of Nigeria has made in recent months ostensibly to strengthen the banking sector, two really stand out for me: first is the approval given to Money Deposit Banks to write off their Non-Performing Loans this year for which they have already made provision for in their income statements. Secondly, is the hike in the Monetary Policy Rate (MPR), otherwise known as the lending rate.
I would prefer to call these policies raft of measures that are not well thought through. They will not help the banks, neither will they stimulate the economy that is currently bleeding from all sides. Of course, this is against the argument advanced by the CBN. Let’s take these two main policies, one after the other. A loan write off is an accounting term that refers to an action whereby the book value of an asset is declared to be zero.
Principally, it serves two main purposes: it supports accounting accuracy objectives. It also creates tax savings. In other words, it’s a reprieve to help the banks navigate through the prevailing economic challenges. The questions to ask include: Are our banks already in turbulent financial waters? Of course, yes. What’s the nature of the portfolio of their Non-Performing Loans? Top heavy. This much is also official. According to the 2015 Annual Report of the Nigeria Deposit Insurance Corporation, the total NPLs of the banks has increased to a frightening 82.87 percent, to N648bn, up from N354bn recorded in 2014. In addition, the banks in the same year under review lost an astonishing N18bn to fraud-related cases.
The truth is that non-performing loans have become such a serious banking problem that threaten the solvency and survival of the banks. Many of the banks are to blame for this. Customers also take a hefty part of the blame as well. That is partly how the banks came to this sorry state. There was no due diligence in the management of their NPLs, as these bad loans continue to accumulate and unserviced by customers.
The naming and shaming of loan defaulters in the media have not really helped matters for the banks. Recently, Diamond bank said its NPLs ratio rose to almost 9 percent by the first half this year, but expects it to fall by 7.5 percent by year-end. Many banks are even in much worse situation than Diamond bank. Few months ago, CBN was compelled to shore up mid-tier lender, Skye bank with a loan, and replaced its management after its capital fell below levels required by the regulators. This prompted the CBN to direct the banks to set aside extra capital buffers against their dollar loans immediately in the wake of a 40 percent fall in the value of the naira.
In addition, the Assets Management Corporation of Nigeria (AMCON), set up in 2010 to absorb the bad loans of the banks in the aftermath of the 2009 globally-induced financial meltdown, was so concerned that it stopped buying NPLs. It says it will now focus on loan recoveries.
In that regard, it is safe to say that the approval by CBN to write off the NPLs is good, at least as a ‘window dressing’ measure particularly in view of, what a banking expert and insurance broker Mrs Iruka Edema describes as the “current grey economic disposition of our nation today, scarce foreign exchange, downward spiral of the naira, upsurge in cost of business and daily living expenses, job losses and salary cuts,” and inflationary trend.
Let us not forget that the decision to give the banks a reprieve on their bad loans was sequel to a letter they wrote to CBN, asking for this reprieve for just one year. Indeed, they had wanted a repeal of the Prudential guidelines, it however gave the banks a ‘waiver’ of sort, for this current year. How far this reprieve will go, only time will tell. But anticipating the environment in which commercial banks will make their management decisions in these tough times is crucially vital.  The banks need reminding that the CBN has made it clear that henceforth, bad loans in their books will be used to asses their liquidity. But, anybody who wants our tottering economy to bounce back must be concerned about the constant hike in the lending rate. It is worrisome that the MPR was last month increased from 12% to 14%. This ‘is a fast way to increase loan default, says Mrs Edema. Governor Nasir el-Rufai of Kaduna state last week drove home the point at Women in Business (WIMBIZ) forum that “CBN is killing the economy.” I agree.
Come to think of it, how many businesses can conveniently borrow at this funding cost and still sustain their operations? That makes the write off of bad loans being ‘smarter’ than half.  It’s simply part of the rafts of policy somersaults that CBN has continued to churn out in recent times. While many banks report non-performing loans or renegotiated loans, over 4,000 workers have lost their jobs in the sector.
If indeed the CBN wants to stimulate economic growth, one of the best ways forward, is to lower lending rate. If inter-bank rate (MPR) is 14 percent, banks of course, will increase their interest rate by perhaps double the MPR. How then does the manufacturing sector survive? Small and medium businesses are completely shut out of access to funds.
Already, manufacturers are under pressure from FX, input costs. Weak consumer purchasing power has dimmed earnings outlook of blue chip companies in the country. For instance, companies like Nestle` (Nig) Plc, Nigerian Breweries Plc, Dangote Cement Plc, and Lafarge Africa, in their half year Report, suffered  combined profit loses of N51.86bn. Other unlisted equities may have incurred more losses during the same period. The real sector is reeling under the burden of rising cost of production in a state of near-economic stagnation.
Altogether, the CBN seems overwhelmed by the present economic challenges. The Federal Government appears even worse. So far, President Buhari seems hemmed in and rattled. This is not the time to surrender. It’s time that calls forth thinking out of the box. This is the moment of truth on the economy.

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