CBN seeks 5% non-performing loans ceiling for banks


TUESDAY, 17 AUGUST 2010 01:20    


The Central Bank of Nigeria (CBN) wants banks to aim for not more than five percent of the total credit to customers becoming classified as non-performing loans (NPLs), BusinessDay investigations have revealed. The development, which is expected to make banks uphold the tenets of effective risk management and maintain financial stability, is in line with the macro-prudential guidelines introduced as components of the post-crisis management of the financial sector.


Besides, CBN is of the opinion that for the Asset Management Corporation of Nigeria (AMCON) to be relevant to the industry, it should encourage banks’ management to “focus on managing a good bank rather than loan recovery; greater ability for markets to price good banks; increased transparency on how the non-performing loans will be managed; greater level of confidence among banks, and decrease in systemic risk”. The initiative is coming on the heels of the anniversary of the banking sector reforms, even as analysts said at the weekend that much is still desired, in spite of the record achievements.


Sanusi Lamido Sanusi, Central Bank of Nigeria governor had, in his August 14, 2010 speech announcing the banking reforms said: “The total loan portfolio of these five banks was N2,801.92 billion. Margin loans amounted to N456.28 billion and exposure to Oil and Gas was N487.02 billion.Aggregate non-performing loans stood at N1,143 billion representing 40.81% of total loans.” However, others believe that government must improve the business environment if the banks are to achieve the target.


Razia Khan, head of macroeconomics and regional head of research, Africa Global Research, Standard Chartered Bank, United Kingdom, said: “A low NPL ratio overall is obviously desirable, but realistically, people would expect different segments of the loan portfolio to have different NPLs associated with them – how much these lending segments contribute to the overall loan portfolio is also important. So, one could imagine a higher tolerance for risky assets in, say, lending to SMEs, so long as banks were able to price for that risk. And so long as the riskier lending did not account for too large a share of banks’ total loan portfolios – so as to put the bank at risk.


For as long as there is room for such flexibility – taking an overall macro-prudential approach – encouraging well-diversified portfolios, reducing concentration risk, aiming for a low NPL ratio should not be too much of a constraint on overall credit growth. There is still room to grow within this. Key rule of thumb: if you are lending to riskier segments where you might expect a greater degree of loan impairment, don’t allow this to be too large a proportion of your overall lending portfolio. That’s the best way to keep depositors’ money safe, while still allowing for credit growth in the economy. If all banks operated on this basis, it is difficult to see why there would not be ample credit growth. As for inadequate controls and the lack of a sound credit policy contributing to NPLs, it is likely that banks will have to revisit their overall risk management framework in order to comply. But isn’t that the whole point of the regulation?” Khan asked.


Johnson Chukwu, managing director and chief executive, Cowry Asset Management Limited said : “The target of 5 percent set by CBN for banks’ non-performing loans is in line with global industry practice. With good risk management system, the banks should be able to drastically reduce the proportion of non-performing loans in their credit portfolio. However, to achieve the target of 5 percent, there must be a significant improvement in the economic environment to reduce the cost of doing business in Nigeria and enhance the survivability of corporate organizations. To appreciate the impact of bad loans on a bank’s balance sheet, one needs to know that for every loan that goes bad, a bank needs to create new loans five times the equivalent of the bad loan in order to recover the lost amount from loan income, assuming an effective risk asset yield of 20 percent.” Victor Ndukauba of the investment research department, Afrinvest, who commended CBN for its achievements in the last one year, said the intervention funds, for instance, are expected to provide credit to real sector at 7.0 percent.


According to Ndukauba, quarterly earnings released by banks in half year, 2010 showed “a return to profitability, albeit with shrinking top-line numbers for virtually all banks. Though turnover growth have been adversely impacted by lack of new risk assets, the low deposit rate environment induced by excess system liquidity has help preserve Net Interest Margins (NIMs) as lending rates have remained stubbornly ascendant. Recoveries of bad loans have led to write backs in loan loss provisions taken in second of half (H2) of 2009, thus impacting the bottom lines of banks. Going forward, the combination of the passage of AMCON and positive financial performance by banks should combine to provide a favourable outlook on the re-consolidation/merger & acquisitions scenario for banks. In addition, our expectations for interest rates to remain largely unchanged over the next half year at least should see this trend in NIMs sustained.”


On the commencement of the banking sector reforms last year, Sanusi said that the reforms were necessitated by excessively high level of non-performing loans in the five banks, which was attributable to poor corporate governance practices, lax credit administration processes and the absence or non-adherence to banks’ credit risk management practices. Consequently, Sanusi said, the percentage of non-performing loans to total loans ranged from 19 percent to 48 percent.Indeed, recourse to macro-prudential rules and dynamic provisioning, necessitating the five percent target for NPLs is to address several of the specific causes of the crisis, among its other aims.





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