The worrisome surge in the banking sector Non-Performing Loans (NPLs) amid shrinking loan book is raising concern among analysts in the financial services sector.
The NPL of deposit money banks stood at 15.18 percent as at September 2017 from 10.13 in December 2016, while their loans and advances declined by 1.3 percent to N15.9 trillion in September 2017 from N16.1 trillion in December 2016, raw data made available by the Nigeria Deposit Insurance Corporation (NDIC) indicated.
Johnson Chukwu, managing director/CEO, Cowry Asset Management limited told BusinessDay by phone that during the period under review, various sectors of the economy such as telecommunication, oil and gas, manufacturing, energy, among others, were in recession and struggled to meet their loan obligations.
Consequently, he said banks embarked on de-risking their balance sheets by recalling loans that are matured. “Banks cannot continue to lend that is why their loan book is shrinking,” he said.
Analysis of banking industry total credit by sector showed that, the Oil & Gas sector constituted 29.59 per cent of total banking industry credit, while Manufacturing, General, General Commerce, Government and Others, constituted 13.41, 8.71, 6.25, 8.34 and 33.70 per cent, respectively, at end-December 2016, the Central Bank of Nigeria (CBN) financial stability report revealed.
Uche Uwaleke, Associate Professor and Head, Banking and Finance department Nasarawa State University, said the major reason for the rise in NPLs is weak corporate governance practices in Deposit Money Banks, prevalence of insider loans and failure to adhere to established credit guidelines.
According to Uwaleke the high interest rate regime aggravated by the difficult economic environment equally contributed.
“High NPLs is a strong disincentive for extending credit facilities and so typically banks tend to be risk-averse and cautious when confronted with high NPLs,”Uwaleke said.
“It is therefore not surprising that loans and advances declined during the period. Also, the tight monetary stance of the CBN must have been a factor.”
The CBN at the last MPC to end the year, retained the MPR at 14.0 per cent; the CRR at 22.5 per cent; the Liquidity Ratio at 30.0 per cent; and the Asymmetric corridor at +200 and-500 basis points around the MPR.
Looking at the way forward, Chukwu said the MPC should bring down the interest rate; the cash reserve ratio and the liquidity ratio.
“The way forward is to step up banking supervision in order to ensure that the banks play by the rules of the game, discourage insider loans, ensure compliance with disclosure requirements, enforce good corporate governance especially with respect to the Board’s oversight function and be ready to replace Bank Boards that are weak and incompetent. Monetary policy easing will also go a long way in reducing NPLs and increasing loans and advances especially to the private sector. By so doing, the DMBs can return to their core function of financial intermediation and make meaningful contributions to the growth of the economy”, Uwaleke said in an emailed response to BusinessDay.
“The rise of NPLs is a salient feature of financial crises. An increasing level of NPLs in any economy impacts on the public confidence on the industry,” Adedapo Adeleke, director, bank examination department, NDIC, said.
Adeleke added that Nigerian banks must establish clear cut credit risk strategy and the requisite institutional changes and risk management processes that will drive their credit administration and prevent the creation of bad loans.
HOPE MOSES-ASHIKE
