Why banks’ bad loans declined to lowest in 7years

The Non-Performing Loans (NPLs) of deposit money banks, also known as bad loans, have declined to lowest in seven years, indicating the healthy status of the financial institutions.

Data from the National Bureau of Statistics (NBS) and the Central Bank of Nigeria (CBN) show that the ratio of banks’ NPL has dropped by 10.61 basis points to 4.4 percent at the end of May 2023 compared to 15.01 percent recorded in 2017.

The continuous decline in NPL was attributable to write-offs, restructuring of facilities, Global Standing Instruction (GSI) and sound credit risk management, according to Sanusi Aliyu, member of the Monetary Policy Committee (MPC).

For the World Bank Group, the improvement has been driven by recoveries, sales, and write-offs as well as the overall growth in the loan portfolio.

Nigerian banks’ total credit to the private sector increased by 88.64 percent in seven years to N41.54 trillion as of May 2023, compared with N22.02 trillion in May 2017, data from the CBN showed.

The commercial banks’ rising loan book reflected increased industry funding base and adherence to the CBN’s Loan to Deposit Ratio (LDR) directive.

The CBN in October 2019 raised the Loan to Deposit Ratio of banks to 65 per cent, after the September 30, 2019 deadline given to the banks to meet its 60 per cent directive.

Aisha Ahmad, CBN’s deputy governor in charge of the financial system stability, said in her personal statement at the January 2020 MPC meeting that the LDR policy retained its efficacy, stimulating substantial increases in private sector loans, lowering market lending rates and has progressively diversified industry credit portfolio.

Responding to the continued decline in banks’ NPLs, Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited, said, “This is a good development to the industry and will also encourage the banking industry to continue to support the growth enhancing sectors of the economy and businesses to create jobs and deliver more prosperity for the Nation.”

Taiwo Oyedele, head of tax and corporate advisory services at PwC Nigeria, said a decline in banks’ NPL ratio is an indication of a sound financial system despite major economic headwinds facing borrowers particularly high and rising interest rates, rising input costs and falling margins.

He said the fact that bank customers are still largely able to meet their loan obligations speaks to the quality of banks’ credit portfolio.

In its recent report on ‘Nigeria Development Update’, the World Bank said some smaller banks hold significant shares of loans classified as stage two under the International Financial Reporting Standards, and are thus vulnerable to further deterioration under continued adverse conditions.

Smaller banks, including microfinance banks that intermediate the CBN’s development finance funding, could see a sharper rise in NPLs in the future as those lending programs target smaller firms and marginal borrowers in the agriculture and manufacturing sectors.

A loan is said to be non-performing when the borrower is in default and has not paid the monthly principal and interest repayments for a specified period.

Ahmad said sustaining banking sector lending to critical sectors of the economy as monetary policy tightens to contain inflation, remains paramount.

“Given the positive correlation of market lending rates to the MPR, borrowing costs have risen, while growth in credit has slowed, she said in her personal statement at the last MPC meeting in May 2023.

According to her, industry credit increased by N4.54 trillion between the end of April 2022 and 2023 with significant portions of the credit granted to output elastic sectors (manufacturing, general commerce, agriculture, information and communication), and has been in an upward trajectory since 2019, yet the monthly trend in credit growth declined from 1.31per cent in March 2023 to 0.05 per cent in April 2023.

She said lending rates also remain high in response to the contractionary monetary policy stance. These developments point to the importance of balanced actions in the pursuit of the price stability mandate.

The CBN on May 24, 2023 raised its benchmark interest rate known as the Monetary Policy Rate (MPR), by 50 basis points to 18.5 the seventh straight time in one year.

The World Bank said Nigeria’s banking system remains well capitalized, profitable, and with improving asset quality indicators but there are pockets of weaknesses.

The banking system capital adequacy ratio (CAR) stood at 13.7 percent in February 2023, down from 14.1 percent in June 2022.6 Larger banks have CARs that exceed minimum requirements by healthy margins while medium and small banks tend to have thinner buffers over the minimum.