By Amechi Ogbonna
Credit default by Nigerian borrowers became a major economic risk this year as bad loans in the Nigerian banking industry soared to their highest level in over six years following the economic recession that has affected several businesses in the country.
According to the Central Bank of Nigeria (CBN) 2016 Financial Stability Report, the banking sector’s non-performing loans (NPLs) rose to 14 per cent in 2016, up from 5.3 per cent a year earlier, while the NPLs stood at 11.7 per cent in June 2016.
“The deterioration in asset quality was largely attributed to the rising inflationary trend, negative GDP growth and the depreciation of the naira,” the report said.
“Overall, credit risk remains tangible in 2017 … in servicing both naira and foreign currency loans.”
In 2011, the bank set a limit of 5 per cent for NPLs after the Assets Management Corporation of Nigeria (AMCON) absorbed industry loans in the wake of a sector-wide bailout on account of massive oil and stock market loans that turned sour.
Since 2014, tumbling oil markets have forced lenders, which have long thrived on loans to oil companies and bond investments, to review their business models. With closing branches and laidong off workers to survive.
The central bank said it carried out a stress test in which it assumed that half of oil loans, which accounted for 30 per cent of industry credit in 2016, turned bad. It said the effect will be for banks’ capital to fall below the regulatory minimum.
“The economic headwinds have adversely impacted bank borrowers, resulting in rising NPLs, which required additional provisioning by banks, thereby reducing the banks’ capital ratio,” the central bank said, adding that mid-sized lenders were most affected.
It said top tier lenders held 88 per cent of industry loans, but added that its examination “confirmed the resilience and soundness of banks in the face of daunting challenges.”