With non-performing loans in the banking sector dropping below regulatory benchmark, Nume Ekeghe writes on the fiscal strategies adopted by the Central Bank to sustain the policies that spurred credit to businesses, individuals
For the first time in over a decade, non-performing loans (NPLs) in the Nigerian banking industry dropped below the regulatory benchmark of 5 per cent, a position Monetary Policy Committee (MPC) members say is as a result of sound regulatory oversight by the Central Bank of Nigeria (CBN). The decline in the NPLs level can also be linked to the Global Standing Instruction (GSI) as well as the forbearance granted banks and their creditors as part of measures to ease the impact of the Covid-19 pandemic on the economy and the banking industry. The forbearance included the restructuring of the loan repayment plans, moratorium as well as the CBN reducing interest rates on all its intervention programmes to five per cent from nine per cent till the end of March 2022.
Declining NPLs
The NPL ratio measures the rate of bank loans that are either going bad because they are not being serviced adequately or have gone bad completely. The current 4.94 per cent NPL recorded in 2021 was regarded by analysts as impressive when compared to 6.1 per cent recorded as at December 2020. In October 2021, the NPL was 5.3 per cent, reflecting progressive improvement, compared with 5.7 per cent in October 2020. Non-Performing Loans Ratio was 5.7per cent, in June 2021, down from 5.8 per cent in May 2021. It fell to 5.70 per cent in June 2021 compared with 6.4 per cent in June 2020, a trend indicating that the banking sector was more resilient. This was largely driven by the implementation of the GSI policy, strengthening of risk management practices.
Rising Credit
In her personal statement at the last Monetary Policy Committee (MPC) meeting held in January this year, the CBN Deputy Governor Aisha Ahmad had noted that in spite of rising credit to the private sector, NPL levels has been good. Total assets in the banking industry had risen to N59.24trillion in December 2021 from N50.99 trillion in December 2020, while total deposits rose to N38.42 trillion from N32.21 trillion over the same period.
“Total credit also increased by N4.09 trillion between end December 2020 and end-December 2021 with significant growth in credit to manufacturing, general commerce and oil & gas sectors. This impressive increase was achieved amidst continued decline in non-performing loans ratio from 5.10 per cent in November 2021 to 4.94 per cent in December 2021, six basis points below the regulatory benchmark of five per cent for the first time in over a decade.
“”The financial system maintained its resilience into 2022 as data provided by Bank staff indicated stability in broad soundness indicators and an unprecedented improvement in asset quality, even as credit to the private sector continued to grow. Capital adequacy as at December 2021 was robust at 14.53 per cent, 453 basis points above the regulatory minimum of 10 per cent.
“Industry liquidity was also strong at 41.33 per cent over the same period and supported by significant cash reserve requirement buffers available to provide liquidity backstops should banks require it.
“Furthermore, results of stress tests showed resilience of banks’ solvency and liquidity ratios in response to potential severe macroeconomic shocks. However, the bank must remain vigilant to proactively manage probable macro risks to the financial system such as lingering spillover effects of the pandemic, winding down of forbearance measures, and myriad risks to financial stability including exchange rate, operational and cyber security risks.” Ahmad stated.
On his part, another member of the MPC, Aliyu Ahmed stated, “The improvement in NPLs is attributed mainly to sound regulatory oversights of the CBN during the year. Gross credit rose from N20.48 trillion in December 2020 to N24.57 trillion in December 2021 on account of increased industry funding base and CBN’s directive on Loan to Deposit Ratio.”
The CBN had put the LDR ratio at 65 per cent, with the aim of increasing banks’ lending to the private sector and easing access to finance, a move some had feared might cause a spike in NPL levels. However, the CBN initiative on Global Standing Instruction (GSI) has been a key factor in the declining level of NPLs in the country.
GSI Impact on NPLs
Operational guidelines of the GSI had recently been reviewed to allow for continuous and unrestricted loan recovery by Deposit Money Banks (DMBs) and financial institutions in the country. The GSI creates a contractual mandate from an individual borrower, in favour of a creditor bank to apply monies standing to the credit of the borrower in a third-party financial institution or electronic wallet to offset the debt obligations of the borrower. It helps to facilitate improved credit repayment culture.
In the latest amendment in the GSI operational guidelines, the frequency of recovery attempts via the GSI platform had been altered from a specific number to continuous and unrestricted. This means that the GSI’s automated loan recovery feature, applicable to all loans in the industry, shall remain perpetually in place throughout the life of the loan and/or until the loan is fully repaid.
The apex bank stated further that the move was in furtherance of its mandate to promote financial system stability. The initiative was fundamentally conceived to address the recurring instances of willful loan default in the industry with a view to identifying and watch-listing recalcitrant debtors, enhancing loan recovery from all eligible and funded accounts/wallets in the banking industry, improving credit repayment culture and reducing Non-Performing Loans (NPLs) in the Nigerian banking system.
An End to Loan Forbearance
However, CBN Governor, Mr. Godwin Emefiele had noted that the updated framework is expected to further reduce incidences of loans going bad thereby leading to better NPLs level. This is critical as the loan forbearance of the CBN ends this month.
The CBN governor, Godwin Emefiele, at the end of the November 2021 MPC meeting, while citing improvement in economic activities, urged businesses to resume loan repayment. “If you recall from our standpoint, we granted a forbearance regime from just two areas.
“One primarily had to do with the fact that we said all loans that companies and businesses that are impacted adversely by COVID-19, that they should be given about two years, we first started by saying one year, from 2020 to March 2021 and by February 2021, we extended it by one more year when the Delta strain of the pandemic continued. That made it two years that would expire by March 2022.
“At this time, we believe that the global economy has opened up; the lockdowns have been lifted and of course, we know the economic damages and fatalities that were caused as a result of the that and I am so sure that not too many counties if at all will in the midst of this pandemic want to embark on a wholesome lockdown any longer. Particularly because most countries are all administering vaccines that they think should assist in reducing the impact of the strain of the virus.
“So, we believe that in Nigeria, businesses/companies are back to business, revenues have improved and if revenues have improved then companies or businesses that took loans. If we say the loans for intervention facilities moved from five to nine, if we see that the moratorium of two years expires in March 2022 and of course, the restructure that you have benefitted remains, then naturally we should expect that companies should be able to pay back their loans.”
A resilient Banking Industry
Meanwhile, a member of the MPC, Adenikinju Festus, stated that the Banking System Stability Review Report showed that the banking system remain safe, sound, and resilient. “Capital Adequacy ratio though declined slightly from 15.1 per cent in December 2020 to 14.53 per cent in December 2021, this is still above the prudential requirement of 10 per cent as NPLs ratio fell below the five per cent prudential requirement, for the first time, after a lengthy period.
“Liquidity ratio at 41.33 per cent was also higher than 30 per cent prudential requirement. Both Returns on Assets and Returns on Equity fell in December 2021 relative to December 2020. Operating costs to income rose from 68.2 per cent in December 2020 to 73.1 per cent in December 2021.
