- CBN has provided â€˜piggy bankâ€™ services to FG through quantitative easing, Salami cautions
Two members of the Central Bank of Nigeriaâ€™s (CBN) Monetary Policy Committee (MPC) â€“ Dr. Doyin Salami and Hassan Balami â€“ have expressed concern over the high level of non-performing loans in four banks in the country.
This was reflected in their personal statements at the July MPC meeting posted on the CBN website Wednesday, ahead of next weekâ€™s meeting.
Against the backdrop of low oil prices, dwindling oil revenue, foreign exchange scarcity and a crippling recession, the last two years have seen an intense weakening of the macroeconomic environment, resulting in a deterioration of asset quality and rising NPLs in the banking industry.
Indeed, several international rating agencies, the World Bank and International Monetary Fund (IMF) have repeatedly raised concerns over rising NPLs in the banking industry.
Salami, in his contribution during the meeting, expressed concern that â€œFour Outlier Banksâ€ had NPLs of slightly over 15 per cent, which exceed the regulatory limit and continue to rise.
The regulatory threshold for banks is 5 per cent. Nigerian Deposit Money Banks (DMBs) are also expected to maintain a Capital Adequacy Ratio (CAR) of 10-15 per cent, depending on the size of the bank.
Systemically Important Banks (SIBs) are required to maintain a CAR of 15 per cent, while smaller banks are required to have a CAR of 10 per cent.
Salami referred to a Financial System Stability Report by the CBN that had highlighted â€œone of the biggest challenges with which the central bank must grappleâ€, saying that at slightly over 15 per cent, the portfolio of NPLs as a proportion of the total loan books of the four banks was above the regulatory maximum and continues to rise.
â€œWhilst Bank Staff continue to note that once the figure is discounted for the impact of â€˜Four Outlier Banksâ€™, the NPL ratio drops to 8.17 per cent. In another set of circumstances, I may be tempted to suspend my judgment and support their position.
â€œHowever, I note that these â€˜Four Outlier Banksâ€™ cumulate in size to at least one Systemically Important Bank (SIB).
â€œI take the view that since the failure of any of the SIBs is a source of concern; excluding these â€˜Four Outlier Banksâ€™ does not adequately take cognisance of the contagion effect which they could trigger,â€ Salami opined.
He noted that perhaps the most challenging of the present characteristics of the economy in Nigeria was the adoption of a quantitative easing (QE) stance by the management of the central bank.
Salami said the CBNâ€™s claims on federal government at N814 billion was twentyfold higher, while the claims of commercial banks rose marginally by 0.4 per cent to N4.6 trillion; 30 per cent increase to N454 billion in CBNâ€™s purchase of government treasury bills; five per cent increase in federal governmentâ€™s overdrafts to N2.8 trillion; and an increase in the mirror account from N3 billion at the end of 2016 to N1.5 trillion in April 2017.
â€œIt is clear that the CBN has provided â€˜piggy bankâ€™ services to the federal government. To prevent the effect of continuous and massive injections of cash to fund the federal government showing up in sharply higher inflation and currency weakness, the central bank now applies â€˜special auctionsâ€™.
â€œWe thus find ourselves at a point where government borrowing from the CBN is â€˜neutralisedâ€™ by raising the Cash Reserve Requirement (CRR) of banks, thereby limiting private sector access to credit. In other words, the private sector is deliberately â€˜crowded-outâ€™.
â€œIt is ironic that the government, in need of tax revenues â€“ having in the first half of the year accumulated its full-year deficit â€“ is constraining the private sector,â€ he added.
Balami, on the other hand, revealed that a stress test showed that the banksâ€™ CAR weakened from 12.81 per cent in April to 11.51 per cent in June, with a slight improvement of the industryâ€™s NPL ratio from 15.18 per cent to 15.07 per cent in June.
He said the banking sector liquidity ratio showed that all banks had liquidity above the minimum of 30 per cent, with the exception of the â€œFour Outlier Banksâ€.
â€œThe stress test therefore shows that the banks are less resilient to shocks. However, the Return on Equity (RoE) and Return on Assets (RoA) registered some improvement from 17.69 per cent to 22.44 per cent in June and 2.32 per cent in April to 2.42 per cent in June 2017, respectively, partly due to the annualised effect.
â€œThe financial performance indicators showed that when the four outlier banks were removed, the CAR, the NPL ratio as well as the liquidity ratio are all above the prudential requirement of 10-15 per cent and maximum of five per cent ratio for NPLs,â€ he argued.
According to Balami, the way forward requires the restructuring of the economy. This, he said, would require diversification of the economy to be an export driven economy.
â€œBoth the federal and sub-national governments need to improve their revenue base and collection efforts and make all levels of government pro-active in promoting growth at all levels through less reliance on the oil and gas sector, he said.
â€œThe clamour for low interest rates cannot happen now because of the high level of inflation and rising operational cost in the economy. Again, there is the need to encourage the inflow of foreign direct investment (FDI), both real investment and hot money into the economy,â€ he added.