The revelation that Non-Performing Loans (NPLs) in the banking sector rose to N1.3trillion by November 2021 is upsetting. The rising debts could cripple banks’ operations and put some of them at great risk of insolvency.
CBN’s Deputy Director, Financial System Stability, Mrs. Aisha Ahmad, said the development was due to the poor credit growth in the country. She also decried the ‘willful refusal’ of many customers to service their loans.
A loan is classified as non-performing when the repayment of the principal and interest are due for more than 90 days or depending on the terms of the loan agreement. As soon as a loan is classified as NPL, it means the likelihood of recovery is significantly lower.
Generally, loans are classified bad debts because chances of recovering them are minimal. Unpaid loan hurts the financial performance of the lender and by extension, economic growth. While the development exposes the banking sector to risk of a possible failure, the banks are sometimes liable by lending to companies and individuals without adequate security. For instance, in 2019, bank loans to companies stood at N17trillion. This is N2trillion higher than the N15.3trn lending to companies in 2018. According to the National Bureau of Statistics (NBS), out of N1.23trillion NPLs recorded in 2020, bad loans in the power sector stood at N830billion.
This has led to the recent takeover of the Abuja Electricity Distribution Company (AEDC) by United Bank for Africa Plc) and the takeover of Ibadan Disco by the Assets Management Corporation of Nigeria (AMCON) over its inability to clear its loans from a commercial bank. Analysis of some banks’ audited annual reports in the last two financial years showed a hefty increase in NPLs. Some of the banks are reported to have their NPL ratios above the recommended threshold for the 2021 financial year.
However, with the CBN’s loans recovery mandate, through the amendment of the operational guidelines of the Global Standing Instruction (GSI), loans recovery by the banks may not be as tough as it used to be, as the guidelines allow for continuous and unrestricted loan recovery. The GSI creates a contractual mandate from an individual borrower in favour of a creditor bank to apply for monies standing to the credit of the borrower in a third party financial institution or electronic wallet to offset the debt obligations of the borrower. This helps to facilitate improved credit repayment culture which is lacking in the country. According to the guidelines, the loan recovery process will remain in place throughout the duration of the loan and/or until the loan is fully repaid. The guidelines further recommend sanctions on banks in the event of violation or misapplication of the GSI. This is likely to check the rising NPLs and save the banks from the risk of regulatory forbearance or systemic failure.
Since the exposure of many banks to the oil and gas sector is one of the factors responsible for the steady rise in bad loans, we urge the banks to diversify their loan portfolios into other viable sectors such as manufacturing and exports. This has become necessary following the volatility in the global oil market. Any fall in price of crude oil will likely lead to toxic debts. It is important that banks and other financial institutions keep to CBN’s loan limits.
According to the CBN, mortgage financial institutions should have a maximum ratio of bad debts at any given time not exceeding 10 per cent. They are expected to also make provisions for credits such as general provision of two per cent of the outstanding balance of such performing facilities, or as may be advised by the apex bank. For commercial banks, the CBN guidelines stipulate that they ensure that the level of bad debt in relation to gross loans does not exceed five per cent.
The guidelines must be followed because when the repayment of the loan is in doubt, the continuation of interest accrued would be recorded, and may not be recovered. That is why AMCON is finding it difficult to recover many debts owed banks by individuals and companies. AMCON should ensure the successful implementation of its newly developed receivership framework for its recovery agents. In all, the solvency of financial institutions should not be compromised. Considering that NPLs are potential threats to the banking sectors, due diligence by banks in loans approval is necessary.