The Central Bank of Nigeria (CBN) recently alerted the nation to the increasing number of Non-Performing Loans (NPLs) in the books of the nation’s commercial banks. This dangerous development, it said, could crash the institutions if they do not properly manage their loans portfolio and credit risks.
The CBN’s Director, Banking Supervision, Mrs. Tokunbo Martins, sounded the alarm at the recent meeting of the Bankers’ Committee in Lagos. She explained that part of the strategy to halt the ballooning loans portfolio and maintain the solvency and health of the banks is to bar serial bank debtors, including the Directors and subsidiary firms of debtor companies, from buying foreign currencies at the official interbank foreign exchange market.
Besides, the apex bank said it may be compelled to publish the names of the “chronic” bank debtors. This, hopefully, would embarrass the debtors and shame them into paying up their debts. The CBN also lamented that in spite of the huge amount spent by the Asset Management Corporation of Nigeria (AMCON) to buy the toxic assets of insolvent banks, some banks are still not paying sufficient attention to their loan policies, while others were found to be overly generous in their loan and credit culture.
We share the concerns of the CBN about the growing NPLs in the banks and their far reaching implications for the banking industry. We do not, however, think that publishing the names of the chronic debtors is the best way of recovering the loans. The publication of debtors’ names in the past led to protests by many debtors who claimed that their loan accounts had not been properly reconciled before the publication. Any attempt to publish the names of these debtors should, therefore, be preceded by proper reconciliation of the accounts to guard against litigation.
Nevertheless, managing the risks of bank lending is crucial. Also, allowing NPLs to be more than the threshold of five percent of total loans could have unpleasant consequences. At present, the loans profile of the money deposit banks is reportedly in the region of N13 trillion to N15trillion, while the non-performing loans figure is about 3.3 percent.
With the benefit of hindsight, it was the overly generous loan terms, apparent lack of clear standards and poor systems in some of the banks for detecting loan problems that culminated in the insolvency of some commercial banks and their takeover by CBN in 2009. The subsequent creation of the Assets Management Company of Nigeria (AMCON) to manage the ailing institutions eventually led to the sale of some of them to healthier banks. It will also be recalled that the problem led to the sack of at least five bank MD/CEOs by the CBN under Sanusi Lamido Sanusi as Governor.
At the time that CBN intervened, the NPLs of the five insolvent banks amounted to N2.2 trillion. A bailout fund of N620 billion was injected into the institutions by CBN in the form of securities and bonds before their sale by AMCON. The N620bn was besides the transfer of N1 trillion by the Bankers Committee into a Special Account called a Sinking Fund to ease the operations of AMCON. The fundamentals of the Nigerian economy are even weaker now than they were six years ago. The economy of the country today may not be able to withstand another round of bank failures.
The fear over the increasing non-performing loans is that virtually every aspect of the economy will be adversely affected if the trend is not urgently stopped. For instance, between 2008 and March 2009, the banks lost over N5.3trn in equity prices in the stock market, especially as a result of massive exposures to credit risks driven by non-performing loans. Banks’ stocks constitute about 65 percent of the total equities in the Nigerian Stock Exchange (NSE). International rating agency, Standard & Poor’s recently reported that the Nigerian banking industry remains highly risky, despite all interventions by the regulatory bodies. Profitability in the sector is also considered suspect in spite of the profits regularly posted by the banks.
However, anything that could undermine investors’ confidence may trigger a run on the banks. We, therefore, urge CBN to intervene in every way it can to ensure that the banks do not allow their loans profile to threaten their performance and the confidence that their customers have in them.
Although the management of the lending function varies from bank to bank, the controversial high interest rates charged by Nigerian banks, and the management of the loans, may be contributing to the high rate of NPLs in the country. There is the need to reduce interest rates in the country, including the inter-bank interest rate, to check the growing NPLs. We say this because interest rate is a crucial monetary policy instrument that could be used to either stabilise or stifle economic growth. Big time borrowers from the banks have often complained that bank interest rates are outrageous and not professionally handled, often resulting in their reluctance and inability to repay credit taken.
Our banks will also need to insist on the perfection of the collateral requirements for the loans that they give out. The present situation in which loans are mostly not properly collateralized is a danger to banks as they have nothing to fall back on when debtors default in their loan repayments.
All in all, to reduce banking risks, non-performing loans must not be allowed to spiral out of control. The health of our banks is of utmost importance.
