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OKEY ONYENWEAKU

Subtle fears are emerging at the moment that deposit money banks may no longer be able to keep, control and sustain low non-performing loans as required by regulatory measures, Business Hallmark has learnt.

The development which has emanated from the continued harsh operating environment for business in Nigeria appears to have reached unbearable levels for stakeholders in more recent times.

The banks seem to also be wearied by the rough circumstances which have overwhelmed them. The implication of this is that non-performing loans will very likely grow above the stipulated regulatory limits this year.

However, the Central Bank of Nigeria (CBN) must have heaved a sigh of relief when the non-performing loans in the banking industry fell to 5.70 per cent in June 2021 from 6.4 per cent in June 2020. But this does not mean the apex bank is resting on its oars. In fact, the Apex regulator has for a while very strictly monitored the banks to ensure that prudential guidelines are followed in extending credit to the private sector.

Whereas the recent NPL of 5.70 per cent appears not threatening, the apex bank’s target is 5 per cent. While the banks have shown resilience, the CBN has told commercial banks to review their loan exposure to oil and gas, agriculture, telecommunication sectors among others.

Speaking at the Financial Market Dealers Association (FMDA) annual conference in Lagos, CBN Governor Godwin Emefiele who was represented by CBN Deputy Director, Financial Markets Department, Patrick Ajani, said the move will help guarantee the stability of their operations.
He said because financial market was undergoing a litmus test and that the time was ripe to review sectoral exposure.

Speaking on the theme: ”Role of Financial Markets in the Nigerian Economy Post-COVID-19″, Emefiele, said banks and other financial markets players had been directed to “now critically assess their exposure to different sub-sectors while continually leveraging technology to support their business operations and continuity”.

Emefiele asked banks to also critically assess third-party provider risks, including businesses within the value-chain of sectors funded by the banks. He urged the banks to sustain its tight prudential regime to bring NPLs below the five per cent provident benchmark. The cautioning of DMBs at this auspicious hour may be hinting at something serious or indicates that something is brewing.

Are the clouds gathering again? Somebody had asked. Nobody is certainly sure. But Non-performing loans in banks have refused to berth at the target of 5 percent. This in fact, is not unexpected. After all, the business environment has been deeply unsettled.

Many have always fingered high insecurity, the devastating effect of Covid-19 among other challenges of fluctuating crude of price, though priced fairly high today at over $80 pbd.
Many are in fact, reminded of the disturbing effect of NPLs in 2009 which hit an all time high of 37 per cent back then. Ever since that time, the Central Bank of Nigeria has fought it with all measure of discretion that it came down to 3.0 per cent in 2014.

Nigeria farmers
Farmers

But the vulnerabilities which caused the spike of NPL s in banks are still causing problems in some quarters.

The Asset Management Company (AMCON) for one has been grappling to recover more than N5trillion which were heaped on its shoulders after the bad bank took those bad loans off financial institutions to give them a fresh start. The banks appeared reckless with loans which caused a hiccup in the banking industry with huge non-performing loans littered in almost all the banks.

Non-performing loans (NPL) experts say is a bank loan that is subject to late repayment or is unlikely to be repaid by the borrower in full. One common feature of NPL is the period over which the principal and interest remain unpaid and un-serviced before a loan is classified as non-performing, they added. In Nigeria, NPLs is classified into substandard, doubtful, very doubtful and lost.

But Folashodun Shonubi, CBN Deputy Governor, operations directorate and an MPC Member was quick to add,
“The non-performing loan ratio improved marginally to 5.7 percent, though it was slightly above the prudential, maximum of five percent’’

The MPC had noted in the last meeting that that the Capital Adequacy Ratio (CAR) and the Liquidity Ratio (LR) both remained above their prudential limits at 15.5 and 41.3 percent, respectively. The Non-Performing Loans ratio (NPLs) at 5.70 percent in June 2021 showed progressive improvement, compared with 6.4 percent in June 2020.

The Committee, however, urged the Bank to sustain its tight prudential regime to bring Non-Performing Loans (NPLs) below the 5.0 percent prudential benchmark.”

‘’An increase in credit risk exposure presents a serious concern for banks because the situation can easily degrade into financial trouble or bankruptcy. The higher a bank’s exposure to credit risk, the much higher
banks tend to experience financial crisis and vice-versa’’, said an expert who wouldn’t want his name mentioned in print.

CBN’s Director of Banking Supervision, Tokunbo Martins, had in 2016 at end of the 326th Bankers’ Committee meeting held in Lagos said, “If people are finding it difficult to get paid their salaries and are not able to pay their loans, it is not unexpected. If corporates are not doing well as they used to do and they are not able to pay their loans, it is not something unusual to see the NPLs rising. The average figure of five per cent NPL is not out of this world.”

Except for the rising price of crude, Nigerians believe the bad operating environment which elicited the above cautioning of banks to mitigate against the risk of high NPLs to their balance sheets, is dominant presently.

After all , CBN data shows that the apex bank created N100 billion credit facility for the healthcare sector where 98 healthcare projects have been funded to the tune of N97.44 billion under the Healthcare Sector intervention Facility (HSIF) as of May 28.

Details also show the Targeted Credit Facility of N100 billion, and N1 trillion to manufacturing sector out of which over N600 billion had been disbursed to manufacturers.

From January till date, N157.5 billion have been disbursed for 29 real sector projects under the Real Sector Support Facility, while N857.6 billion have been disbursed for 234 real sector projects from inception November 2018 till May 28, 2021.

In the same vein from January to date, N26 billion have been disbursed for 10 projects under the COVID-19 Manufacturing Intervention Scheme (CMIS) while N255.9 billion have been disbursed for 78 projects under the CMIS from January 2020 till May 28, 2021.

In the five-year Policy Trust of the CBN- 2019 to 2024, Emefiele promised to improve access to credit for Micro, Small and Medium Enterprises (MSMEs) as well as spur consumer spending to stimulate growth and enhance employment, among others.

Emefiele said the resilience of the structure needed to support the financial market is very paramount in ensuring that the processes of keeping the banks stable is realised.

He said the industry players witnessed other pre-existing issues that were worsened by the COVID-19.

According to him, in apparent reflection of the severe impact of the pandemic on the economy, 17 banks had earlier written to the CBN for permission to restructure 32,000 loans granted to individuals and businesses.

The said loans, amounting to several billions of naira, are going bad.
The apex bank’s directive further reinforces the need for cyber-resilience in the face of rapid technology adoption.
Many have observed that insecurity is affecting the massive agric projects that FG encouraged through single digit loans.

DMBs and NPLs

DMB’s have in fact, shown seriousness in adhering to prudential guidelines to impede the rise of NPLs in recent times.
For instance, Union Bank of Nigeria Plc recorded marginal increase in NPLs ratio in the period under review, while Wema bank Plc record significant drop in its NPL ratio in the period.

However, ETI Nigeria and FBN Holdings are the only two banks with NPL ratio above the regulatory threshold in H1 2021.

As reported in the H1 2021 unaudited results, ETI Nigeria’s NPLs dropped to 17.per cent from 19.90 per cent recorded in H1 2020, while FBN Holdings reported 7.20 per cent NPL/Gross Loans from 8.80 per cent recorded in H1 2020.

The Group Managing Director, FBN Holdings, U.K. Eke had while commenting on the bank’s H1 results said the macro and socio-economic conditions remain challenging given the COVID-19 pandemic and the low-interest rates environment.

He said the financial institution remains committed to its strategic objective of driving further stability in performance, as well as delivering sustainable growth over the years to come.

Further findings revealed that Wema Bank Plc’s NPLs closed H1 2021 at 3.50 per cent from 5.60 per cent in H1 2020 just as Sterling Bank’s NPLs declined from 1.90 per cent in H1 2020 to 1.79 per cent in H1 2021.

In addition, FCMB Group NPLs declined from 3.50 per cent in H1 2020 to 3.30 per cent in H1 2021, while Union Bank of Nigeria’s NPL ratio increased to 4.30 per cent in H1 2021 from 4.00 per cent recorded in H1 2020.

Further analysis of the results showed a 13.4 per cent increase in FCMB Group NPLs to N3.78 billion in H1 2021 from N2.55 billion, dragging the financial institution NPLs by value to N32.21 billion in H1 2021 from N29.77 billion recorded in H1 2020.

Analysts attributed banks decline in some bank’s NPLs to ease of COVID-19 lockdown, effective management of credit risk and reduction of risk to some sectors.

Commenting on the decline in some banks’ NPLs, the managing director, High cap Securities, Mr. David Adonri, extolled the banks for their ability control their non-performing loans and keep them low.

“Industry gross credit increased by N6.63 trillion from N15.57 trillion at end-May, 2019 to N22.20 trillion at end-July, 2021. The credit growth was largely recorded in manufacturing, oil and gas and agriculture sectors.” The CBN had noted.

Recall that the CBN sacked the Boards of FBN holdings and FirstBank on Thursday 29 April 2021, saying the problems at the bank were attributed to bad credit decisions, significant and non-performing insider loans and poor corporate governance practices.

‘’The bank maintained healthy operations up until 2016 financial year when the CBN’s target examination revealed that the bank was in grave financial condition with its capital adequacy ratio (CAR) and non-performing loans ratio (NPL) substantially breaching acceptable prudential standards.”

The apex bank also observed “The problems at the bank were attributed to bad credit decisions, significant and non-performing insider loans and poor corporate governance practices. The shareholders of the bank and FBN Holding Plc also lacked the capacity to recapitalize the bank to minimum requirements. This conclusions arose from various entreaties by the CBN to them to recapitalize”.

According to Emefiele “The insiders who took loans in the bank, with controlling influence on the board of directors, failed to adhere to the terms for the restructuring of their credit facilities which contributed to the poor financial state of the bank. The CBN’s recent target examination as at December 31, 2020 revealed that insider loans were materially non-compliant with restructure terms (e.g. non perfection of lien on shares/collateral arrangements) for over 3 years despite several regulatory reminders. The bank has not also divested its non-permissible holdings in non-financial entities in line with regulatory directives”

Former CBN Governor, Sanusi Lamido Sanusi had also on August 13, 2009 sacked the Managing Directors/Chief Executives and Executive Directors of five banks namely, Afribank PLC, Finbank PLC, Intercontinental Bank Plc, Oceanic Bank Plc and Union Bank Plc for reckless management of the institutions.

These chief executives were Mr. Sebastine Adigwe (Afribank), Mr. Okey Nwosu (Finbank), Dr. Erastus Akingbola (Intercontinental Bank), Dr. (Mrs.) Cecilia Ibru (Oceanic Bank), and Dr. Barth Ebong (Union Bank).

Sanusi said: ‘’excessive high level of non-performing loans in the five banks which was attributable to poor corporate governance practices, lax credit administration processes and the absence or non-adherence to the bank’s credit risk management practices.
Thus the percentage of non-performing loans to total loans ranged from 19% to 48%. The 5 banks will therefore need to make additional provision of N539.09 billion’’.

‘’For the lender, non-performing loans imperils the capital requirement limits and therefore make it difficult to grant new and probably more quality credits. Non-performing loans weigh down a bank’s balance sheet and the attendant charge offs decrease a bank’s profitability.

According to available research, countries with low non-performing loan ratio tend to experience faster GDP growth rate. Non-performing loans decrease banks’ willingness and ability to lend as the banks tend to spend time looking to recover on such loans than making new loans,’’ said an expert who would not be named.

Are we on the throes of another quite challenging deja vu moment then?
Only time will tell.