Ever since the Central Bank of Nigeria blacklisted 113 companies and their directors, whose loans – primarily non-performing – are in excess of N5 billion and had been taken over by the Asset Management Corporation of Nigeria, the affected debtors have been lobbying quietly to get the central bank to reverse the decision. The ignominy of being blacklisted aside, they are worried that by barring them from accessing further bank credit, the CBN has sounded the death knell on them and their businesses. Some have even argued that they need to keep borrowing to refinance their loans, raise money for working capital to save their businesses from going under and prevent job losses.
On the last point, they might be right. But the fact of the matter is if the loans were not being serviced, they were already bankrupt. As such, they have no one else to blame for their sorry state but themselves. Since the crisis in the banking system in 2009, a number of measures have been taken by the authorities to reverse the culture of financial impunity arising from financial recklessness, mismanagement of the banks and a raft of debtors unwilling to repay their loans. From bank managing directors who were summarily dismissed and dragged to the courts for insider lender and mismanaging the institutions that they ran, the name and shame tactics employed by the central bank between August and October of that same year to get debtors repay the loans, to the establishment of AMCON as a resolution vehicle for bad bank debts.
The measures notwithstanding, the bulk of the debtors who were listed three years ago still dominated the new list compiled by the central bank last month. Although the loans have since been taken over by AMCON, a cursory glance shows that like 2009, the new list was dominated by local oil and gas companies and stock broking firms. In 2009, banking system exposure to oil and gas companies and the capital market accounted for more than 70 per cent of loans that had gone bad. In effect, nothing much had changed between 2009 and 2012. The only distinguishing factor was that the same bad loans had been moved from the banks to AMCON.
The irony is that when AMCON was established in 2010, quite a few of these debtors consciously courted the banks to transfer their loans to the corporation. They felt that with AMCON, they would be under less pressure to repay their loans, could restructure them under less stringent terms and could maintain their luxury lifestyles without a care in the world. But what they did not bargain for was that the central bank would come down hard on them again until they repaid what they owe.
In defence of the CBN’s directive to banks on the bad debtors, its deputy governor, Financial System Stability, Dr. Kingsley Moghalu, told this writer that if the central bank had not blacklisted the chronic bad debtors, it would be reversing the financial system stability, which had been achieved through the establishment of AMCON. Also, the reluctance or refusal by debtors to repay their loans taken over by AMCON presents a moral hazard and could encourage others to act in the same irresponsible manner, he explained. More important, the culture of financial indiscipline, especially by borrowers who believe they are above the law and can borrow without paying back, must be stopped.
What these debtors do not realise is that by allowing AMCON to assume their loans, their businesses and assets have effectively been taken over by the Federal Government of Nigeria and they have no hope of recovering them until they repay their loans. Is it any wonder that Mr. Femi Otedola, whose company, Zenon Oil and Gas Limited, had the highest exposure to the banking system, wisely gave up most of his assets to wipe his slate clean?
The lesson to be learnt from Otedola’s experience is that others still indebted to AMCON would have to pay up or lose the shirts on their backs. Those opting for the courts to challenge the interest charges and penalties imposed by the banks, quite frankly, are wasting precious time, because they have a negligible chance of winning their cases and would still have to pay what they owe after the law suits have run their course.
A better option for them is have the loans restructured and ensure that the loans are performing for a reasonable length of time, which could encourage AMCON to ask for a review from the central bank on a case-by-case basis. On this, Moghalu said AMCON would be required to advise the CBN on the new status of the debt. Such reviews, he added, will be periodic, may be every six or 12 months, after which the debtor may be delisted.
Another option is for a debtor, who honestly wants to pay, to apply to AMCON for working capital under a restructuring plan as provided under Section 6(1)(c) of the Act establishing the corporation. That section provides that the corporation shall have the powers to provide equity capital on such terms and conditions as it may deem fit. But on this, its managing director and CEO, Mr. Mustapha Chike-Obi places a caveat. According to him, even though there is a window to give some working capital to companies under the Act, as a regulated entity, AMCON would have to inform the CBN which must be satisfied that the debtor has the capacity to pay and will not fritter it away. Expectedly, companies that qualify for such consideration includes the airlines – Arik, Aero Contractors and Air Nigeria – as well a few others in critical sectors of the economy.
But it is not just debtors that owe AMCON more than N5 billion that the CBN intends to target. Based on information made available to this column, the central banks plans to periodically review the list and lower the threshold of bad bank debtors to N1 billion. The thinking in the central bank is that debtors with the habit of going from one bank to the other accumulating loans without repaying should also be blacklisted in order to safeguard the banking system.
In more advanced jurisdictions, debtors with a poor credit rating are not only barred from borrowing; if and where they get new loans, these loans are granted under the worst possible terms. That way, the propensity for financial indiscipline by the banks and borrowers is largely kept at bay.
Economic Stimulus vs. Savings
Under the 2013 -2015 Medium Term Expenditure Frame and Fiscal Strategy Paper presented by President Goodluck Jonathan to the National Assembly, the government is proposing a crude oil benchmark of $75 a barrel for the 2013 budget. One reason is that by establishing a conservative benchmark price, excess revenues accruing from oil sales could be saved for the rainy day.
The House of Representatives, on the other hand is proposing to increase the oil benchmark in next year’s budget to $82 a barrel. The House is arguing that by increasing the benchmark, more revenue will accrue to the government for capital spending and would reduce the budget deficit and government borrowing.
Although the legislators may be acting out a script on behalf of their state governors and may appear imprudent, their position should not be dismissed with a wave of the hand. Almost two years ago, I wrote an article on finding a balance between stimulating the economy and saving for the future. That article still remains relevant today and has been replicated in part:
“Savings beyond planned investment is not what Nigerian needs at this juncture. What excessive saving does is to create the false impression that all is well on the surface as long as base macroeconomic indicators state so, but unemployment, poverty and income inequalities will continue to persist. What this means is that certain wrong macroeconomic actions are leading to inefficient aggregate macroeconomic outcomes, such that the Nigerian economy is operating below its potential output and growth rate.
Realistically, the best way to diversify the economy is for government to de-emphasise, not completely jettison savings, and invest more in capital infrastructure projects capable of creating new jobs and opportunities for the unemployed. The impact of investment by government is that it has a cascading effect on the economy. When it injects funds into capital projects, this results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so on.
Economists term this the circular flow of income, and is inevitable because the initial stimulus starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.”