The Central Bank of Nigeria (CBN), last month, commenced the implementation of a stringent forbearance policy, which requires Deposit Money Banks in the country to halt dividend payments indefinitely, defer executive bonuses, as well as foreign investment, at least for now. The apex bank says the measure is part of broader efforts to strengthen the financial system and ensure asset quality such as significantly reducing Non-performing loans ahead of the new recapitalisation threshold deadline in December.
The move is also a relief mechanism used by the regulatory authority in times of economic crisis such as during the 2020 COVID-19 pandemic-induced stress when the CBN allowed relaxed loan restrictions, interest rate and moratorium in order to help banks that were heavily facing bad loans to restructure. That move allowed financial institutions the flexibility and temporary leniency in meeting certain regulatory requirements aimed at reinforcing capital buffers to support struggling borrowers to avoid financial crisis, thereby improving banks’ balance sheets, and provide support for banks that have financial stress or unable to meet key prudential standards, which are a set of guidelines for measuring and assessing the financial stability and risk management practices in the sector.
The forbearance policy mainly affects banks already in breach of credit exposure limits known as Single Obligor limits (SOL). This is the maximum loan amount a bank can issue to a borrower relative to his net worth. Therefore, the policy is meant to navigate potential risks associated with excessive lending to individual clients, and prevent financial instability in the banking sector. With the policy framework, banks will henceforth face a more disciplined regime that could redefine how they manage risks, restructure their loan profile and profitability, especially in these tough times of increasingly volatile, global and domestic macroeconomic environment.
According to data from the CBN, bad loans of seven Nigerian banks have surpassed N1.57trillion. Though their aggregate non-performing loan ratio declined by 3.93 per cent, down from 4.18 per cent in 2023, it has been on the rise lately by 30 per cent from N1.21trn against the backdrop of a 39 per cent surge in total customer loans, which have increased to N40trillion due to a combination of naira depreciation and the pursuit of higher interest income. The bad loans profile is also linked to rising inflation, foreign exchange volatility, and foreign currency-denominated loans that now have a higher nominal value in naira terms.
It also reflects a strategic response by banks to boost their interest earnings. The latest statistics from the World Bank on Nigerian banks show that bad loans reached alarming increase of 5.1 per cent in the Q1 2024, compared to Q1 2023. The ratio is marginally above the prudential benchmark of 5 per cent. This means that a slightly higher percentage of loans issued by Nigerian banks are at risk of default than what is generally considered safe. One of the consequences is that some banks might be at great risk if certain perks such as executive bonuses, dividend payments to shareholders and new investments abroad, are not halted so that the banks can restructure their loan portfolios to meet capital adequacy standards which the CBN can verify independently.
All things considered, the forbearance policy could be seen as a step in the right direction, especially since it will make it incumbent on banks and other financial institutions to account for loan risks now rather than later as is currently the case. This will ensure that the banks make adequate provisions for potential default, with a clean balance sheets going into the new financial year.
No doubt, a solid financial institution ultimately benefits the economy by enabling more responsible lending, fostering financial stability and boosting investors confidence. However, there are legitimate concerns whether the content and timing of the directive is apt. Many experts are of the view that coming at this time it could be potentially disruptive to ongoing capital-raising efforts by the banks to meet the CBN recapitalisation mandate. In that regard, many banks may be in a race against time, which may boomerang later. It could be recalled that soon after the CBN circular on June 13, several banking stocks in the Nigerian Exchange Limited (NGX) Index witnessed a sharp decline by 4 per cent.
Most of the stocks already under pressure from interest rate volatility and rising impairments reacted negatively. Some of the big banks in the country recorded significant losses. The immediate reaction of the market on June 14, reflects growing anxiety over the stability and solvency of Nigerian banks. While compliance with the regulatory forbearance may be good and intentional, CBN must ensure that its implementation does not drag the broader market into negative territory, thereby defeating the objectives of the policy.