We commend the plan to introduce new capital rules to check banks’ rising bad debts in the second quarter of the year by the Central Bank of Nigeria (CBN). The initiative is in tandem with the apex bank’s regulatory control of commercial banks. Although the envisaged capital rules could mount pressure on banks, which are already weighed down by bad debts, we support any measure that will prevent distress in the sector.
According to the CBN, the new rules will protect the nation’s banking industry against shocks by increasing the level of regulatory capital and the quality of the banks’ assets. Under the plan, the apex bank will “apply a leverage ratio to supplement existing capital ratios” for lenders as well as “additional loss-absorbency requirements for domestic-systemically important banks”. The CBN further explained that country and cross-border risk guidelines are being developed for the assessment of risks arising from across border operations of Nigerian banks.
Considering the insolvency witnessed in the sector in the past, the CBN said it has become expedient for stricter regulatory rules. We recall that some years ago, some banks had to be bailed out to avert total collapse. The capital ratio inadequacy of the banks was such that government had to establish the Assets Management Corporation of Nigeria (AMCON). Over N2trillion was spent to absolve the bad debts of the distressed banks.
The new rules become inevitable in view of the increasing Non-Performing Loans (NPLs) in the banks. Figures from the National Bureau of Statistics (NBS) show that NPLs in the banking sector increased to N2.245trillion in the third quarter of last year from N1.938trillion in the second quarter. This is said to represent about 40 per cent of the 2019 Federal budget of N8.7trillion. The NBS data also show that the NPL ratio rose to 14.16 per cent at the third quarter from 12.45 per cent in the previous quarter, compared to the CBN limit of five per cent.
In the same vein, the annual report of the Nigeria Deposit Insurance Corporation (NDIC) of 2015 revealed 82.87 per cent rise in the NPLs of commercial banks. In real terms, the value of NPLs in 2015 was N648.8billion from N354.34billion recorded in 2014. As a result of this high volume of bad and doubtful loans, some banks are trying to avoid a situation that can attract the sanctions of the apex bank.
Our position remains that bad loans are dangerous to the health of the banks. They must be effectively regulated for banks to make profits. Undoubtedly, the lending function is perhaps the most diverse and complex activity in banking. However, the sharp increase in bad debts has to be addressed through tougher capital rules. In planning to do this, the CBN is aligning itself with the global agreement reached some years ago in Basel, Switzerland, known as Basel Three. The apex bank had delayed the implementation of the accord after a contraction in Nigeria’s economy.
This is also coming after policy makers had, six years ago, rejected some requirements drawn up by the Basel Committee on Banking Supervision. Following the rejection, Nigerian banks opted for the International Financial Reporting Standards (IFRS) in the conduct of business affairs across boundaries. This standard forced banks to provide for existing losses as well as those that might occur in the future. As events in the industry have shown, this standard did little to put the banks in sound financial footing. Rather, it eroded banks’ capital adequacy ratio as high as 200 basis points.
In all, we believe our economy remains vulnerable to both local and external shocks due largely to deterioration in debt sustainability and rising bad debts in the banking sector, low capital adequacy and weak capital assets. Therefore, we urge the apex bank to ensure that the new rules are properly examined before implementation. For the banks to be well managed, stricter control is quite inevitable.