HOPES that the nation’s Deposit Money Banks (DMBs) would take advantage of the reprieve granted them by the Central Bank of Nigeria (CBN) last year to clean bad debts off their books and develop a coherent strategy to reduce their Non-performing loan (NPL) portfolios have dimmed as the banks’ NPLs have soared even higher, to more than double the limit set by the apex bank.
According to the regulator’s Financial System Stability report released recently, the banking industry NPLs ratio rose from N1.678trn in June to N2.084trn in December 2016. The report stated that the ratio of bad debts to gross loans increased from 11.7 percent in June to 14 percent in December 2016. The CBN requires commercial banks to keep their bad loans below five percent.
The power, oil and gas, manufacturing, general commerce and services sectors account for the highest proportion of the NPLs. This is not good news for the banking industry, which is currently struggling with the economic downtown in the country. Implicitly, the report has cast doubts on the financial soundness of the banking sector, even though the CBN continues to vouch for the financial stability and resilience of the nation’s banks.
The financial soundness indicators used to appraise the stability of banks include asset quality, capital and income-expense, among others. The re- port also said that the CBN conducted routine and special examinations of foreign exchange activities of the banks during the period under review. The review reportedly uncovered a series of infractions. These included breaches in critical areas like forex trading position limits, failure to repatriate export proceeds in time, and inappropriate involvement of the banks in international money transfers, for which they have been sanctioned. The regulatory agency also stated that it recovered N21.27bn from the banks last year being excess charges illegally deducted from ac- counts of customers.
Although the macro-economic headwinds in the country have resulted in a slowdown in economic activities in the country, and have impacted on the rising NPLs, the debts are largely a result of the bad decisions of the banks themselves. The CBN, last year, approved a write-off of bad loans for which the banks had already made provision in their balance sheets. The idea was to enable them to clean their books of NPLs, ensure accounting accuracy and create tax savings. The approval was the out- come of a letter written by the Bankers Committee, urging the regulator to allow the banks clean out their bad debts until the end of 2016. The approval for that request was conveyed by the Director, Banking Supervision, at the CBN, Mr. Tokunbo Martins.
To accommodate the request, the CBN agreed to amend Section 3.21(a) of the Prudential Guidelines, which requires commercial banks to retain a certain percentage of their bad loans fully provided for in their records. However, the CBN refused the banks’ request that Section 3.21(a) of the Prudential Guidelines be repealed.
The banks ought to have seen that approval by the CBN as a reprieve, or better still, a bailout of sorts to help them put their houses in order. It has turned out that they did not. Even the nation’s biggest banks have posted startling bad debts. In 2015, the Annual Report of the Nigeria Deposit Insurance Corporation (NDIC) revealed a staggering 82.87 percent rise in the banks’ NPLs to N648bn, from N354bn in 2014.
No matter the assurances given by the CBN, we do not think the banks have done well in their loans market. In the same vein, we doubt if the CBN has per- formed its supervisory and regulatory roles as it should. The regulator may have put its eyes off the ball while the banks embarked on unbridled lending spree. It must be emphasised that at least four factors are basic in evaluating the likelihood that a loan will be repaid promptly and in full. These include the determination of the borrower’s character and credit history by the lender. Secondly, the lender must ascertain the specific use of the loan and the appropriateness of such use. Also, the lender must evaluate the source of repayment, which is normally related to the borrower’s primary operating activity, and finally, the lender needs to identify a secondary source of repayment (collateral).
It is doubtful that our banks adhered to these essential principles in the case of the non-performing loans. All in all, considering the important roles of the banking industry in the economy, the banks should strengthen their credit/ loan/risks departments while the bank- ing regulatory authorities should be more up and doing.