Reduction of banks’ bad debts

It is commendable that, for the first time in many years, Nigerian banks have recorded appreciable reduction of their bad debts. According to figures from the Central Bank of Nigeria (CBN), banks’ non-performing loans (NPLs) stood at N1.2trillion as at the end of June 2020. This represents about 6.4 per cent of the gross credit of the banks in the economy which stood at N18.9trillion for the period under review. Non-performing loan is the sum of money borrowed in a loan contract in which the borrower failed to make the required repayment agreed for at least 90 days.

The significant drop in NPLs is an indication of confidence in the nation’s banking system. Figures from the National Bureau of Statistics (NBS) on selected banking data showed that the lending institutions ‘ non-performing loans stood at N1.67trillion as at the end of March 2019, from a figure of N1.79trillion as at the end of 2018. Data for the fourth quarter (Q4 2019) which was released recently also showed that NPLs dropped to N1.05trillion in 2019, down from N1.79 trillion recorded during the preceding year. According to the report, the banks recorded decline in NPLs despite the fact that they provided more credit facilities to the private sector in 2019.

The regulatory authorities should monitor closely the banks’ compliance with the prudential guidelines and other regulatory measures to sustain the tempo, especially at this time of global economic uncertainties. There is need to avoid a relapse to the early years where the banking industry posted huge amounts of bad debts in their books. For instance, the Nigeria Deposit Insurance Corporation (NDIC) annual report for 2015 showed 82.87 per cent increase in NPLs of all Deposit Money Banks. This amounted to N648.8billion, up from the N354.34billion recorded in 2014.  In specific terms, the bad debts in 2015 alone constituted about one-tenth of the Federal budget in 2016.

Therefore, banks should check the factors fuelling non-performing loans and sustain the measures that are keeping bad debts at bay. The decline in bad and doubtful debts is also an indication that the CBN loans-to-deposit ratio that was introduced last year to address the credit challenge in the sector is working and yielding the expected results, as affirmed at the recent  MPC meeting by the CBN Governor, Godwin Emefiele. These credits were reportedly recorded in the manufacturing, consumer credit, general commerce, and   information and communication as well as agriculture sectors of the economy.

It is heartening that the banks have, since August 3, commeneced the implementation of the CBN’s  Global Standing Instruction, which allows them to recover outstanding debts from other banks. This followed discovery that many wealthy individuals are owing many banks and thereby increasing bad debts in the sector. With the new measure, banks are now authorised to use debtors’ funds in some banks to offset their loan repayment in another bank. This is one of the reasons bank loans to companies in 2019 was reported at  N17.19trillion, which represents an increase of four per cent when compared to total loan of N15.13trillion that was disbursed to the private sector in 2018.

Since the exposure of many banks to the oil and gas sector is one of the factors behind the rise in bad loans, to sustain the present decline in bad and toxic debts, we urge the banks to diversify their loan portfolios  into other viable sectors such as manufacturing and export. This has become necessary in view of the fall in oil prices in the global market. It is also important that banks and other financial institutions observe the CBN’s limits on bad loans. According to the guidelines,  mortgage financial institutions should have a maximum ratio of bad debts at any given time not exceeding 10 per cent. They should 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 from time to time. For deposit money 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 continued increase in non-performing loan ratio could reduce the banks’ capital base and lead to loss of depositors’ money. 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 Assets Management Corporation of Nigeria (AMCON) is finding it difficult to recover many banks’ debts.Henceforth, AMCON must ensure the successful implementation of its newly developed receivership framework for its recovery agents. Above all, everything should be done to sustain the reduction of banks’ bad debts.