Banks’ NPL loan ratio rises above CBN limits

By Chinwendu Obienyi

The Non-performing loans (NPLs) ratio for Nigerian banks worsened in 2020 as it blew past the Central Bank of Nigeria (CBN)’s regulatory limits of five per cent to close at six per cent at the end of December 2020.
This was contained in the apex bank’s Monetary Policy Communique (MPC) during its recent meeting in Abuja.
NPL ratios refer to the percentage of bank loans that are bad as against the total loans which the banks have in their balance sheet. The CBN Governor, Godwin Emefiele, while reading the Monetary Policy Communique, explained that banks’ NPLs rose to 6.01 per cent at the end of 2020 higher than the regulatory limit of 5 per cent allowed by the apex bank.
“The MPC noted the marginal increase in the NPLs ratio which rose to 6.01 per cent at end-December 2020 from 5.88 per cent at end-November 2020 and above the prudential maximum threshold of 5 per cent.” While noting that this development is not unexpected under the prevailing circumstances, it urged the “bank to strengthen its macro-prudential framework to bring NPLs below the prescribed benchmark,” he said.
Daily Sun investigation revealed that as of the third quarter of 2020, NPLs was about N1.1 trillion with oil and gas loans representing N238 billion or 11.3 per cent of the total.
The rise in banks’ NPLs ratios, according to economic analysts, is mostly due to the weakening economy in 2020, triggered by the economic lockdown introduced to curb the spread of COVID-19. With the economy shut down for the most part of the year, businesses in the country recorded little to zero sales affecting their ability to service their loans when due.
Furthermore, they noted that the CBN’s policy of persuading banks to lend more may have also increased the NPL ratio, as increased lending to the private sector in a year where the economy was battered also led to higher NPLs.
According to data obtained from the National Bureau of Statistics (NBS), banking sector credits rose by as much as 19 per cent in 2020 due to the fact that banks aggressively lent more in line with the CBN’s loan to deposit ratio (LDR) policy.
Analysts at Nairametrics, noted that the CBN also recognized the inertia caused by its policy when it stated that “Aggregate domestic credit, also moved further up by 13.40 per cent in December 2020, compared with 9.48 per cent in the previous month.
“Nigeria’s NPL ratio of 6 per cent for its banks could have been worse than it currently is if not for the regulatory forbearance granted by the central bank due to the COVID-19 pandemic.
This is because banks were allowed to restructure most of their loans deferring principal repayments for borrowers who faced cash flow challenges due to the pandemic and without the forbearance, the non-performance ratios of the banks could have been worse than the 6 per cent”, they explained.
The MPC had commended the CBN for maintaining a sound regulatory surveillance over the banking system by ensuring a reasonably low level of NPLs, even with the aggressive credit expansion programme during this crisis period.

“Though, NPLs remained slightly above the prudential benchmark, members noted that the banking system remained stable, strong and resilient.Given the success recorded under the LDR policy, it thus urged the Bank to sustain its risk surveillance approach and ensure the continued soundness of the banking system”, the communiqué revealed.