THE Nigeria Deposit Insurance Corporation (NDIC) annual report for 2015 indicates an 82.87 per cent increase in the Non-performing Loans (NPLs) of commercial banks in the country. The report, which was released last week, put the value of NPLs in 2015 at N648.8 billion, up from the N354.34bn recorded in 2014. The same report also put the total amount lost to 12,279 fraud-related cases in the banking sector at N18.021bn for 2015, a drop of N7.59bn or 29.63 per cent compared to the N25.608bn lost in 2014.
These disclosures in the Corporation’s statement of account for the banking sector in 2015 highlight the need for better corporate governance in our Deposit Money Banks (DMBs). Although a Central Bank of Nigeria (CBN) Financial Stability Report (FSR) last month attributed the high rise of toxic loans in 2015 to the sharp drop in oil prices in the international market, it is necessary to sound the alarm and do a thorough revaluation of our banking processes, with special regard to corporate governance.
Bad loans are dangerous for the health of DMBs and everything that is necessary must be done to ensure we do not relapse into scenarios from our recent past when our banks had to be bailed out to avert a total collapse. The poor state of the banks at the time led to the government’s establishment of the Assets Management Corporation of Nigeria (AMCON), through which over N2 trillion was used to bail out some distressed banks.
The bottom line is that the sharp increase in the NPLs has to be addressed and curtailed, if the health of the banks is not to be compromised. Any threat to the banks is sure to have adverse consequences for the nation, considering that banks’ equities constitute about 65 per cent of stocks in the Nigerian Stock Exchange.
The exposure of many banks to the oil industry is one of the key factors behind the spiral in their NPLs. Oil, by its very nature, is volatile and the country hardly controls any aspect of its value chain. We expect the banks to consider these in their loan risk assessments. Their over-exposure to the oil sector is, indeed, symptomatic of poor corporate governance, sometimes manifesting in gross inefficiency and crass corruption in the administration of loans. This unfortunate situation is raising salient questions on the practice of banking in the country. Revelations from various audits of the oil supply business, especially during the immediate past administration, indicate sharp and disingenuous practices in the procurement and distribution of the product. Some of the fuel marketers got bank facilities to import oil that they either never brought in or diverted to neighbouring countries or other locations different from the ones agreed with the banks. This should have alerted the banks to the need to be thorough in their loan processes.
From the trajectory of non-performing to bad loans, why is it that the banks are unable to foreclose on the collaterals with which these loans were secured? Or did the banks disburse loans without properly securing them? We hope not. If that were the case, the NDIC and the Bank Examination Division of the CBN would have a case to answer.
The NPLs for 2015 alone constitute one-tenth of our 2016 federal budget. That is a huge amount to trifle with. Agencies with oversight functions on banks should wake up to their statutory responsibilities. There appears to be too much laxity in the administration of extant regulations. For example, with the NDIC having made these troubling disclosures on the banks, what happens next? Concerted efforts should be made to drastically reduce the incidence of bad loans in our banks. There is a threshold beyond which the toxic loans must not go. It should be strictly enforced, and when banks default, they should be sanctioned. This is important in securing the health of our financial sector, which is key to the overall well-being of our economy.
Also fuelling the increase in NPLs is the issue of high interest rates that our banks charge. While the banks may argue that their high interest rates are to provide a buffer to the high incidence of NPLs, there is no doubt that the high rates are an incentive for these same customers to default. How are genuine businesses expected to pay interest as high as 25–30 per cent on loans for transactions that depend on a number of variables, most of which they do not control? The lending institutions and their regulatory agencies have to reflect on this and reconsider the current excessive interest rates to reduce the chances of loans going bad.
We believe that a significant reduction in lending rates will reduce NPLs and boost the real sector as more businesses will be able to take and repay loans. Let the banks be more circumspect in the administration of loans even as they adjust their interest rates to the realities of the times.