The recent drop in bank’s non-performing loans (NPLs) by 24 per cent is encouraging. The latest figure released by the National Bureau of Statistics revealed that the banking sector’s N8.17trillion NPLs for 2018 was N1.38trillion lower than the N9.54trillion recorded in the 2017 fiscal period. The statistics also showed that as the NPLs ratio continues a downward trend, capital adequacy and liquidity ratios of the banking sector are improving.
Though the ratio of non-performing loans to total loans dropped to an encouraging level, it remained higher than the five per cent regulatory threshold of the Central Bank of Nigeria. This means that even as the downward trend in bad loans is cheering, the monetary authority should not lower its guard. Rather, it should monitor the banks and implement policies to further reduce the NPLs. This has become imperative as aggregate credit expansion to the real sector of the economy continues to pose serious challenges.
In fact, an analysis of the NPLs for 2018 showed that the banking sector recorded N2.18trillion in the first quarter of 2018, while in the second quarter of 2018, the figure dropped by N250billion to N1.93trillion. During the third quarter of last year, the NPL portfolio rose by N306billion to N2.25trillion, before dropping to N1.79trilion in the fourth quarter of 2018. Also, out of the N15.83trillion credit granted by the banks to the economy in the first quarter of last year, about N2.18trillion was non-performing, while in the second quarter, the banking sector provided a total credit of N15.58trillion out of which N1.93trillion was classified as non-performing loans. For the third quarter and fourth quarter of 2018, total credit given by banks was N15.86trillion and N15.35trillion respectively, out of which N2.24trillion and N1.79trillion were recorded as bad loans. A breakdown of credit to the private sector revealed that oil and gas received the highest credit allocation with N3.55trillion, followed by the manufacturing sector with total loans of N2.23trillion, while real estate sector got N622.7billion. The NBS figures indicated that banks’ lending to the economy dropped to N15.353trillion in 2018 from N15.959trillion in 2017. The reduction in the banks’ non-performing loans in 2018 does not call for much celebration because it was largely due to the approval given to the commercial banks by the CBN to write off bad loans, which they had made provisions for in their 2016/2017 balance sheet. Therefore, the banks should not see the decline of NPLs in 2018 as evidence of sound management policies or the quality and liquidity of their assets or adequacy of capital. Instead, they should step up measures to significantly reduce the ratio of bad loans and improve on credit delivery to the real sector of the economy, especially agriculture and manufacturing. Improving credit to the real sector is vital for economic growth and job creation.
It is also important that the Federal Government should offset its huge contractor debt, which the CBN explained was partly responsible for the huge non-performing loans in the banking sector. If the N2.7trillion contractor debt is paid, they would be able to service their loans to the banks. The Federal Government should accord some form of liquidity status to some of these debt that will help to further reduce the bad loans so that the banks can focus on their key role of stimulating growth and supporting credit delivery in the economy. However, the banks must be more circumspect in granting loans to customers. It is in their best interest to do so because NPLs increase tax liability and erode the bank’s liquidity.