Assessing impact of recession on banking sector

As part of efforts to acquaint journalists with the developments in the banking sector, specifically in relation to the impact of current economic recession on the industry, the Nigeria Deposit Insurance Corporation (NDIC) gathered a group of economists, experts and resource persons from the Corporation at Kaduna over the weekend to look for way forward.

Biodun Adedipe, an economists acknowledged that banking business is highly vulnerable to the vagaries of the economy through two channels including, the transmission effects of recession on bank customers, and the direct impact on banking institutions as business entities.

Typically, the business cycle impacts banks more intensely in their lending operations.  The ultimate aim of lending is the collection of the loans and other facilities granted, along with the servicing by the borrowing customers.

As such, the current and expected states of the economy have great impact on the lending activities of banks and the safety of risk assets.

Specifically, Non-performing loans in the first half of 2016 grew by 158 per cent from N649.63 billion at end-December 2015, to N1,678.59 billion at end-June 2016, according to a report by the Central Bank of Nigeria (CBN). The industry wide NPL ratio rose to 11.7 per cent from 5.3 percent, thus exceeding the prudential limit of 5.0 per cent.

At the just concluded workshop for finance correspondence and business editors organised by the Nigeria Deposit Insurance Corporation (NDIC) in Kaduna, Adedipe, pointed out that one of the issues or factors that banks have to contend with during economic recession is general slowdown of business, which leads to income/profit decline. The likely remedy, Adedipe said is for banks to dimension the economy for emerging opportunities.

Another issue is default in loans repayment and interest payment, leading to increase in NPL, need for more provisions and capital erosion. The likely remedy includes, tighter credit scoring, revamped recovery strategies, aggressive earnings retention and/or fresh capital injection, and intensified regulatory oversight.

Speaking further on the impact of recession on the Nigerian banking system, Adedipe said generally, banks are highly vulnerable to economic recession, financial crisis and mortgage crisis.

Non-performing loans will mushroom as the business space for them also shrinks and their profits decline. He noted that profits in the Nigerian banks are not plummeting because is several aberrations in the banking system, including high interest rates, and spread as well as the counterproductive foreign exchange management system.

He urged banks to scale up controls and cyber firewalls, build capacity for fraud and forgeries detection and control.

In his presentation on, “refocusing banking supervision in Nigeria, in an era of economic recession”, Adeleke  A. A, director, bank examination department, NDIC, said the supervisory authorities would continue to take proactive measures to assure financial system stability.

While calling for active collaboration of all stakeholders, Adeleke said NDIC would continue to take measures to engender confidence in the financial system.

The impact economic stress is being felt differently by banks but not on the scale to precipitate systemic crisis.

According to Adeleke, the systemic impact had been contained by early adoption of macro-prudential supervision by regulatory and supervisory authorities.

The current economic crisis which has its root in oil price slide have resulted to crystallization of exchange rate risk and credit risk, in particular, on the balance sheet of banks.

HOPE MOSES-ASHIKE