As 2020 dawned, bankers were digging out of the harsh regulatory environment and a stock market rout that sent share price tumbling, as investors continued to dump shares over poor corporate performance and lack of policy direction on the part of the Buhari led administration.
Now, as Covid-19 wreaks havoc, a gathering tsunami of distressed credit wreaking havoc and undermining directors that had worked hard to stabilize their entities.
Of course, during an economic downturn, a lot of loans are irrecoverable, which results in write offs.
Large volumes of bad loans can cause banks problems with their capital adequacy and, at worst, can lead to default. Bad loans also risk impairing long-term economic growth and lead to greater uncertainty in the banking system which results in elevated financial stability risks.
A non-financial company that consistently uses the chunk of operating income to meet interest expenses obligations will have accumulated losses in its balance sheet. What this means is that it is susceptible to default on loan convenience.
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Nigerian banks have booked impairment charges on financial assets more than they did during the recession of 2016 when a precipitous drop in oil price of mid-2014 stoked severe dollar scarcity that dealt a great blow on external reserves.
The Covid- 19 induced bad loans are not visible to the eyes because it is a natural mystic in the air, but analysts can see the virus in the books of the largest lenders in Africa’s largest economy.
The largest Nigerian lenders have set aside a combined N128.66 billion in September 2020 from N90.33 billion the previous, according to data gathered by Businessday. That’s the fastest expansion in 5 years since Businessda started gathering data.
However, the value of non-performing loans, NPLS, in Nigeria’s banking industry rose marginally by 3.0 percent to N1.21 trillion in the second quarter of 2020 (Q2’20) from N1.18 trillion in the first quarter, 2020, Q1’20.
Banks’ impairment losses are also anticipated to surge on the back of guidelines prescribed by IFRS 9. The key import of IFRS 9 is the introduction of a forwardlooking “expected loss” impairment standard that requires banks to provide more timely recognition of expected credit losses (ECL), based on future expectations, in place of the “incurred loss” model.
The macroeconomic headwinds do not support lending as loans are expected to be muted on the back of weak consumption patterns and high unemployment rates.
It is rational for banks to maintain a low profile in the form of subdued profitability in the next one year than extend credit to bad borrowers.
What that means is that the government has to remove the infrastructure bottleneck hindering companies from magnifying earnings and effortlessly meeting obligations to financial institutions.
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