Encouraging responsible borrowing in banking sector

The issue of non-performing loan (NPL) has been a major challenge in banks and other financial institutions in Nigeria.

The Nigerian banking industry’s volume of NPLs increased by N38.05 billion or 13.30 percent from N286.09 billion in December 2012 to N324.14 billion in December 2013.

Exotic Frontier Equity Research had provided three scenarios on the possible cost of risk trajectories for the banks. Under the Best case scenario, the firm estimates the average cost of risk and NPL ratio increases by 100bp and 130bp in FY15 to 2.3 percent and 4.3 percent, respectively.

In its Base case scenario, it assumes the average cost of risk and NPL ratio increases by 210bp and 200bp in FY15 to 3.4 percent and 5 percent, respectively, while in Worst case scenario, “we assume cost of risk for each bank increases to crisis-level highs and therefore estimate an FY15 cost of risk of 6.0 percent,” the firm stated in a report.

However, the Central Bank of Nigeria (CBN) in collaboration with the Bankers’ Committee last week took a bold step to encourage responsible borrowing in the banking sector as it decided to restrict chronic borrowers from access to foreign exchange. The committee also said it would publish the names of these serial borrowers.

The measures, according to Tokunbo Martins, director of banking supervision, CBN, are to ensure safety and soundness of the banking industry.

“The CBN has managed to keep the banking industry safe and sound in collaboration with all members of the Bankers’ Committee. But one issue that was of concern was that some debtors are becoming increasingly difficult to get them pay up on their loan. It was decided that going forward one thing that we may do is to stop them from getting access to foreign exchange; another thing that we also considered that we may do going forward is to publish the names of borrowers that refuse to pay up on their loans,” she said.

Currently, the total loan in the industry is in the region of N13 trillion to N15 trillion, and the industry’s non-performing loan is about 3.3 percent compared with 5 percent benchmark.

“We do not want to get there, and that is why we decided that we need to come out with these measures,” she said.

Analysts see this as a welcome development but cautioned against a shortfall in the availability of foreign exchange.

“While it appears to be one means of encouraging more responsible borrowing practices in Nigeria, the risk is that under current conditions it might further exacerbate perceptions of a shortfall in the availability of FX. This is something that the authorities will need to guard against,” Razia Khan, managing director, head, Africa Macro Global Research.

The Committee also agreed to reduce the limit of debit card usage abroad. This is following the discovery that people are using naira debit card in a manner that were not expected.

Explaining further, Martins said: “This specifically refers to the use of these cards abroad because when they are used abroad, the merchant has to be settled and even if it is ATM the provider has to circle in FX; so we found that will put a drain on FX resources available to finance the industry. There is going to be a reduction in the allowable draw down using naira debit cards abroad.”

The biometric verification was also discussed at the meeting.

According to the Committee, it is critical that account holders continue to proactively get their BVN numbers from the banks as it would become progressively difficult for them to access credit if they do not do that.

 

HOPE MOSES-ASHIKE