Though still above regulatory threshold of 5 percent, the Non-Performing Loans (NPLs) ratio of Nigerian deposit money banks, which had risen to 14.70 percent in August 2018, has declined to 14.05 percent in October, signalling an improvement.
Robert Asogwa, member of the Monetary Policy Committee (MPC), said this in his personal statement at the last meeting held in November, which was released on Wednesday by the Central Bank of Nigeria (CBN).
He said the modest improvement in the Capital Adequacy Ratio (CAR) and the Profitability Indicators (ROE and ROA) in October as compared with August showed that the financial sector weaknesses, which were a key concern at the last MPC meeting of September, were partly being halted.
Adeola Festus Adenikinju, a member of the MPC, also admitted that the report on the banking system stability showed some improvements across major financial soundness indicators, like the capital adequacy ratio, liquidity ratio, returns on equity and assets as well as the NPLs ratios.
This, according to Adenikinju, is an indication that the measures taken by the apex bank have started to yield some positive results.
“I am also pleased about additional measures being considered by the bank to ensure the continuous soundness of the banking and financial sector. This is critical to address the incidence of NPLs, improve credit flow to the economy and perhaps more importantly, boost confidence of the banking public on the overall soundness of the financial sector,” he said.
Dahiru Hassan, another member of the MPC, noted that the ratio of credit to gross domestic product (GDP) was low, noting, “Credit to other sectors of the economy, particularly when Deposit Money Banks (DMBs) are not willing to do so is weak; therefore, we can encourage the establishment of more micro-finance banks and strengthen the existing ones so as to improve access to credit to poor. However, this may result into conflict of interest to the CBN.”
However, Asogwa further said while the trend of financial soundness indicators (NPLs ratio, the Capital Adequacy ratio and profitability) look positive and improved in November as compared to the statistics presented in the MPC September meeting, the volatility and frequent swings in these core indicators are all signs of unresolved financial sector weaknesses.
For instance, the NPLs ratio although decreased in October, remains high and heavily concentrated in the key sectors, which contribute more than two thirds of the country’s national revenues. With many of these firms relying more on bank financing rather than market financing, a surprise tightening of monetary policy could further expose these vulnerabilities thus derailing the recovery process.
Identifying the primary obstacles to the NPLs resolution will be critical for a complete balance sheet clean up which will structurally address the financial sector weaknesses in Nigeria.
