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Banks And Non-performing Loans

The feelings in the Nigeria’s banking sector is that the level of non-performing loans within the system may lead to yet another crisis in the industry. Non-Performing Loans (NPLs) are those loan facilities which banks are unable to profit from because they are not serviced as anticipated. Non-performing loans consist of both old debt that is not performing and new loans that may become non-performing.
A critical factor that affects the poor performance of loans in the banking system is economic fluctuations such as short term inflation, high lending rates and level of risk where the economy is not doing well, etc. These NPLs affect the earning power of the banks, which in turn affects the bank’s return on capital and lead to poor performance levels.

Recently, the Central Bank of Nigeria (CBN) revealed that the total amount of non-performing loans of Nigerian banks for the year 2018 had hit N1.79 trillion. The figures revealed that N13.56 trillion was recorded as loans after specific provisions. The data, which was validated by the National Bureau of Statistics, also showed that the gross loans by the end of 2018 stood at N15.35trillion.

By the end of 2017, available statistics revealed that the gross loans in the banking sector were N15.96trillion. It was further revealed that N2.36trillion of the 2017 figure were non-performing loans, while N14.12trillion were loans after specific provisions. Although most of the soundness indicators are still within the prudential requirement, it is a matter of utmost concern that these indicators are almost at the threshold of the requirement.

This newspaper is of the opinion that there seems to be too much impunity in the system as there are some loan defaulters who see themselves as being above the law. They connive with some insiders in the banks to perpetrate nefarious acts. To put it bluntly, these non-performing loans are mostly as a result of insider abuse.

Recently, the Asset Management Corporation of Nigeria (AMCON) complained that less than 400 Nigerians owe the corporation a staggering N5 trillion. Out of this intimidating debt sum, N902 billion is owed by those rated as delinquent defaulters; no one expects to collect anything from them.

The managing director/chief executive officer, Mr Ahmed Kuru has pledged the full support of AMCON to its Asset Management Partners in the effort to recover N740billion of the total eligible bank assets of AMCON portfolio in the hands of debtors.

There is no smoke without fire. There are some factors that contribute to NPLs in the banking sector. Poor credit risk management is one of the major causes of non-performing loans in the banks. Poor credit risk management is a situation where banks have little or no adherence to lending policies. Efficient credit risk management in Deposit Money Banks (DMBs) is germane not only because of the recurring financial distress and crises, but also because it is a central factor which determines survival, growth and profitability.

Capital inadequacy is another factor. It is important for banks to maintain credit risk exposure within their limit depending on the baseline credit assessment of each DMB to maximize profit.

The excessively high level of non-performing loans in the DMBs can also be attributed to poor corporate governance practices. This has posed a major concern to different stakeholders including bank management which granted the loans, depositors whose funds have been misappropriated and trapped and regulatory agencies whose major responsibility is to protect the system. Although the Nigeria Deposit Insurance Corporation (NDIC) said the Code of Corporate Governance for bank directors was instituted to address the rising cases of insider bad loans, which not only represent a conflict of interest, but are against the prudential guidelines for the industry, insider lending which accounts for a substantial proportion of bad debts is another one.

Also, the rate at which some influential citizens obtain loans with no intention to pay through internal connivance to circumvent the credit assessment procedures has contributed in a number of ways to the increased non-performing loan portfolio of several DMBs in the country.

It is instructive to say that the federal government also contributes to the worsening NPLs in the banking system. The federal government owes pensioners, contractors, construction companies, exporters, electricity distribution companies (DisCos), generation companies (GenCos), state governments, judgment debts and petroleum products marketers a total of N5.6 trillion.

If the federal government can clear this domestic debt, the contractors would service their loans and reduce the distress in the banking system.

It is also imperative for the banks to step up measures to significantly reduce the ratio of bad loans. We urge players in the sector to ensure adherence to sound banking system to avoid the collapse of the financial system.

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