One of the issues discussed at the Nigeria a Deposit Insurance Corporation (NDIC) 2017 annual workshop for business editors and finance correspondents in Kano last week was ‘Curtailing the Growth of Non-Performing Loans (NPL) in Banks – the Role of Regulators and Supervisors’.
As presented by Adedapo Adeleke, director, bank examination department, NDIC, NPLs are known to respond to macroeconomic conditions, such as GDP growth, unemployment, and inflation, there are also indications of strong feedback effects from the banking system to the real economy.
The non-performing loan growth could be traced to banks’ lending policies which had been relatively unselective and competition driven with little consideration for associated risks; inadequate appraisal of loans and poor assessment of obligors and sectors in which they operate leading to loan concentration and lowering of under-writing standards, rapid credit growth, which was associated with lower credit standards; and poor GDP growth rate which became negative in the first quarter 2016 and resulted in recession by the second quarter of 2016, among others.
Over the years, Nigerian banks had concentrated lending in various industries and sectors such as oil and gas and telecommunication, buoyed by the growth in such industries and sectors.
Recent hiccups in the oil and gas sector following the crash in the international price of crude oil has resulted in some obligors in the sector being unable to service their loans.
The recent economic recession witnessed in the Country has also contributed in the increasing rate of loan defaults in banks.
The Risk Assets examination of 20 Deposit Money Banks (DMBs) as at December 31, 2016, revealed that of the total industry loans portfolio of N15,597.32 billion, the sum of N3,105.94 billion(or 19.91%) was non performing. The 19.91% NPL ratio was a 79.04 percent increase over the average industry ratio of 11.12 percent recorded as at December 31, 2015.
The Financial Stability Report for 2017, issued by the CBN, indicated that the ratio of non-performing loans net of provision to capital for the banking industry increased to 38.4% in 2016 from 28.4 percent as at December 31, 2015.
Also the Financial Stability Report issued by the CBN as at 31st December, 2016 indicated a disproportionate credit allocation to the oil and gas sub-sector by the Nigerian banks. Sectorial Allocation to oil and gas as at 31st December, 2016 was 29.59 percent. Manufacturing, general commerce and government were 13.41 percent, 8.71 percent and 8.34 percent respectively. Others comprising of telecoms, power, real estates, and services among others accounted for 39.95 pacent.
The industry NPL ratio which stood at 10.13% as at December 2016 rose to 15.18% by September 2017.
While the NPL ratios and the volume of non-performing loans continued to grow up till Sept, 2017, the total loans advanced by the industry continued to decrease in volume as banks curtailed lending and concentrated on loans recovery drives.
The Non-Performing Loan to Total Loan Ration in the banking industry has risen significantly since 2015 and had gone well beyond the maximum regulatory limit of 5%.