Rising NPL: Banks cut loans, opt for fixed income in H1 2017

FELIX OLOYEDE

Nigerian economy which has struggled to exit recession may be sitting on a keg of gun power as banks cut down credits to the private sector in the bid to push down soaring non-performing loans (NPLs).

Review of the 2017 half year financial results of commercial lenders in the country showed that the risk assets of seven systemically important banks, excluding Skye Bank, dipped by -2.11 per cent to N6.94 trillion against of N7.08 trillion in the same period last year.

Lenders shied away from extending credits to the private sectors and majority of them opted to put their money in fixed income securities. As a result the investment in fixed income securities of five of the “too big to fail” banks soared by 1665.76 per cent to N37.34 billion during the period under review from N2.11 billion in December last year.

But the huge N630 million loss (H1 2016: N1.53 billion) and N3.65 billion loss (H1 2016: N33.09 billion) FBN Holdings and Access Bank incurred in investment securities dragged the average revenue the seven systemically important banks considerably down by -87.87 per cent in the first six months of 2017.

“This is not a good picture of what we are trying to achieve, because without credit to the private sector, the growth will not be there. We discovered that more credit went to government, because it is crowding out the private sector. And that is not good for the economy,” Mr Ambrose Oruche, Director, Corporate Affairs, Manufacturers Association of Nigeria (MAN) told BusinessHallmark in a telephone chat.

He noted that high interest rate of almost 30 per cent and lull in business prompted private sector operators to abandon loans, adding that manufacturers are worst for it.

The International Monetary Fund (IMF) had earlier this month raised concerns over the rising delinquent loans in Nigerian Banking industry, which jumped to 11.73 per cent at the end year of 2016 and is said to have reached almost 14 per cent in June 2017, catalyzed by the present economic crunch. The regulatory benchmark for NPL is five per cent. This has spurred commercial lenders to cut down their risk assets.

GTBank, Nigeria’s most capitalized commercial lender made the largest slice of its loan portfolio in the first six month of the year, shearing it by-7.83 per cent to N1.31 trillion from N1.42 trillion in December 2016. It was followed by Zenith Bank and First Bank, which cut their credit to customers by -4.46 per cent and -4.10 per cent respectively during this period. FirstBank has set a single obligor limit of N30 million to address its NPL challenge.

“Banks don’t just lend anyhow; they must benchmark it against their liquid assets, reserves and capital or shareholders’funds. You cannot blame banks for cutting down their loan portfolios, because of the due to the economic challenge in the country they may want to withdraw and review their positions before they embark on massive lending against,” Mr. Emma Nwosu, former Managing Director, defunt ACB International Ltd posited.

He argued that commercial lender must have embarked on this credit cut, because of losing depositors’ funds to customers, whose businesses have been seriously hit by the recession, adding that if banks don’t take precautionary measures, it may boomerang and affect the entire economy.

However, the fiscal authority, spearheaded by the Minister for Finance, Mrs. Kemi Adeosun, has been clamouring for reduction of the country’s Monetary Policy Rate (MPR), which currently stands at 14 per cent, in order to encourage productivity. The Central Bank insisted that cutting of rates would worsen Nigeria’s inflation rate, which was 16.1 per cent in June. The apex bank has a 6-9 per cent inflation rate target for 2017. The divergence of views between the fiscal and monetary authorities has been of concern to analysts who believe would slow down the country’s recovery process.

“If banks are cutting down loans to customers, it is a picture of what is happening at the level of the customers. It shows people are still suffering the effect of recession. Loans are demand driven. If you don’t have turnover, you don’t take a loan, because it is high cost taking a bank loan,” explained Dr Boniface Chizea, Managing Consultant, BIC Consultancy Services Ltd.

He urged the government to take a second look at the cost of funds in the country, saying there is urgent need to review the monetary policy rate, because Nigerian manufacturers cannot be competitive with the present 14 per cent interest rate when their counterparts in other parts of the world borrow as low as 1 per cent.

Nigeria has been in recession since the first quarters of 2016 and the economy contrasted -0.52 per cent in Q1 2017, but the country exited recession in Q3. The IMF has forecast that Africa’s largest economy would grow 0.8 per cent this year.