Economy: Banks’ non-performing loans record steady decline

The banking industry has recorded steady drop in Non-Performing Loans in recent times despite increasing lending to boost productivity in key sectors of the economy. The success achieved so far has been attributed to proactive measures taken by the Central Bank of Nigeria to tackle the menace bad of loans threatening the stability of the banking industry. BAMIDELE FAMOOFO reports other factors mentioned by financial experts that made the feat achievable.

Nigerian lenders have increased cash flow into the private sector of Africa’s largest economy in recent times to enhance productivity and drive economic growth. As at the last quarter in 2020, the Central Bank of Nigeria (CBN) puts the total credit by banks to the private sector at N20.37trillion. It represented an increase of 2.5 percent or N500billion over N19.87trillion injected into the economy in third quarter of 2020. The big deal, however, is that the non-performing loans portfolio (NPL) of banks has continued to get better in spite of the decision of banks to increase credit to critical sectors of the economy. Statistics obtained from the National Bureau of Statistics (NBS) by Saturday Telegraph showed that the percentage of non-performing loans compared to gross loans portfolio of banks have has witnessed a steady improvement in the last three years, spanning from third quarter of 2018. The NBS indicated that the figure dropped from 14.16 percent in Q3 2018 to 6.02 percent in Q4 2020. Meanwhile, financial experts have attributed the development in the industry to both market and regulatory factors. A Researcher and Financial Analyst at Cordros Securities Limited, Gbolahan Ologunro, attributed the development to two factors. He hinted that the strong recovery in oil prices have led to improvement in asset quality particularly for oil and gas related exposure, given that a high proportion of industry loans are related to the oil sector. In addition, he said, the re-opening of the economy amid the tepid improvement in macro conditions impacted positively on exposure to sectors such as trade, general commerce and transportation. Mr. Marcel Okeke, Economist and Former General Manager at Zenith Bank Intelligent unit said, the regulatory stance of the central bank is a major reason why non-performing loans in the industry is recording a steady progress. His words: “The CBN has now made it clear to the banks that it is keenly watching the performance of their credit portfolios and also ready to wield the big stick when the operators fail to comply. Also, the forbearance policy of the CBN helped the banks in this regards.” On the other hand, Okeke noted, that the federal government, through its agent, Economic and Financial Crimes Commission (EFCC) is showing interest in what is happening in the industry. “They are now keen about who the bank lends depositors fund to. They watch closely to detect any insiders’ dealings which is a major reason why loans default happen. Recently the NFIU asked all the staffs of banks to declare their assets. You know it is the staff of the banks that will process the loans and there are tendencies for manipulation. But with the searchlight of the EFCC beamed on them, you will see a big decline in insiders’ related credit which forms bulk of the bad loans,” he said. Another reason given by experts for improved performing loans portfolio in the banking industry is the caution they now take to give out credit. It is noted that banks now follow through with the rules of good corporate governance in lending as they know that the stakes are now high. On the other hand, borrowers are also aware of the punitive measures that await them when they play pranks with the banks when they borrow money from them. So they are compelled to abide by the rules to pay back what they borrow as at when due.

Sectorial Performance

Meanwhile breakdown of the performance credit to the private sector in fourth quarter in 2020 as released by the National Bureau of Statistics (NBS) in May showed that the Oil & Gas and Manufacturing sectors are biggest beneficiaries of credit to the private sector from the banking industry. In terms of credit to the private sector, the total value of credit allocated by banks stood at N20.37trillion as of Q4 2020. Oil & Gas and Manufacturing sectors got credit allocation of N3.93trillion and N3.19trillion to record the highest credit allocation as at the period under review. Breakdown of credit to Oil & Gas sector recorded the biggest increase quarter on quarter in fourth quarter of 2020 by 19.3 percent to N3.93trillion. Manufacturing sector recorded an increase of 15.7 percent at N3.19trillion, emerging the second biggest beneficiary of credit from the banking sector. In line with the interventions of the CBN in the Agriculture sector to boost food production and generate employment, commercial banks increased credit exposure to the sector to the tune of 5.2 percent quarter on quarter with total credit standing at about N1.05trillion in the review period. Power and Energy as well as Mining & Quarrying recorded marginal growth of 2.2 percent and 0.1 percent to about N444billion and N11.9billion respectively. Year on year sectorial change in NPL showed that huge progress was recorded in the Agriculture sector where NPL dropped by -23.31 percent from N51. 55billion as at end of December 2019 to N39.53billion in Q4 2020. Manufacturing recorded a decline of 3.33 percent from N103.08billion in Q3 2019 to N99.65billion in Q4 2020. Transportation and Storage achieved a big gain as NPL declined by about -24.0 percent while Education dropped by -22.48 percent in the period. Power and Energy also improved by about -28.0 percent.

Regulatory Interventions

Mr. Godwin Emefiele, Governor of Central Bank of Nigeria said the proactive policies of his administration are responsible for the new dawn in the banking industry. Mr. Emefiele had in 2019 given a matching order to banks to increase lending to the economy. Banks have the mandate to lend out at least 65 percent of their deposits portfolio to businesses. According to Emefiele, the policy was to encourage lending to SMEs, retail, mortgage and consumer lending. Preceding the policy of the central bank on lending to the private sector which is aimed at stimulating growth in the economy, commercial banks would rather lend to investors who would invest in short term yield financial instruments like the treasury bills than make funds available to the real sector. “In other to meet up the LDR policy, they are avoiding giving loans to the real sector and instead are giving loans to speculators who now go to buy treasury bills. The whole aim of this policy would be defeated by this kind of practice. So, the CBN will deal with any bank that tries to circumvent this policy,” a source at the CBN disclosed. Continuing, he said: “What we are saying is that banks must lend. So we prescribed the LDR. Now that they are ready to lend and at reasonably low rates and not buying securities, people should not borrow to buy securities thereby arbitraging.” He stressed the need to support activities that would drive economic growth in the country. “The economy must see growth induced by higher consumer and manufacturing output. We will crack down on banks and companies that would attempt to game our policies through financial markets arbitrage. “Nigerians have been praying for low rates. So if borrowing rates from banks are coming down, companies should take the loan to conduct their manufacturing business and not get involved in arbitrage.” Specifically, the apex bank warned that any bank that is found to be disbursing loans to customers who subsequently invest such funds in treasury bills and other money market and capital market securities, would be sanctioned and the customer blacklisted. It is also believed that the agreement between the CBN and other lending institutions to seize the bank savings of customers that borrow money and refuse to pay back has greatly helped to check the menace of bad loans in the industry. They agreed that the deposits in the customers’ other banks’ accounts should be used to service the unpaid loans. Under the agreement, borrowers would be made to sign an agreement that if there was a default, the bank would have a right to access the borrowers other accounts.




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