• Wednesday, June 12, 2024
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Banks ruffled as court ruling on electricity tariff aggravates NPL concerns


Nigerian banks have been hit by a myriad of shocks lately, and last week’s court ruling which annulled the 45 percent increase in electricity tariff may have compounded lenders’ balance sheet woes.

Lenders had average Non Performing Loan (NPL) ratios of about 6.2 percent at end-March 2016 as uneasy calm pervades the banking system over their huge exposure to energy firms, including oil and gas, and power.

Experts say the prospects of servicing the loans granted to the power sector in 2014 are slimmer following the inability of distributing companies (Discos) to pass on the increased cost of gas to electricity consumers.

Under the auspices of the Multi-year Tariff Order (MYTO), Nigeria Electricity Regulatory Commission (NERC) had increased electricity rates by a maximum of 45 percent with effect on February 1. 

The price swing had become necessary due to the increase in the cost of gas to $3.2 from pre-levels of $1.80, according to George Etomi, the director of Eko Distribution Company.

However, a Federal High Court sitting in Lagos, Wednesday, gave a ruling which repealed the existing tariff structure used by the 11 electricity distribution companies (Discos) to bill their consumers for electricity services to them.

Though NERC has appealed the ruling and filed for stay of execution, bank officials who were interviewed in writing this article are apprehensive over the power sector’s capability to service loans running into N300 billion, as deduced from their financial results.

United Bank for Africa Plc’s audited results for 2014 showed that lending to the power sector stood at N83.60 billion, while First City Monument Bank’s full year results revealed that its lending to the power and energy sector in the year was N25 billion. In the period under review, Fidelity Bank Plc’s lending to the power sector gulped N58 billion while Skye Bank Plc’s loan book showed that it lent N19.35 billion to the power sector. Sterling bank dished out N13.743 billion, while Union Bank Plc and Diamond Bank Plc granted a total of N23 billion and N50.8 billion, respectively.

“The judgement spells doom for banks with high exposure to the power sector as the financial sector grapples with liquidity capital adequacy ratio concerns,” a bank official on condition of anonymity said in response to questions.

The country’s financial services sector was hammered after the Central bank of Nigeria (CBN) dissolved the management team of Skye Bank for failing to meet minimum thresholds in critical prudential and adequacy ratios, and various sources say it the sector may be in worse shape than government is willing to disclose.

Other sources tell BusinessDay that banks that hitherto were enthusiastic about investment in the power sector and had secured deals based on the new tariff regime would now shy away from such deals on the tariff hike reversal.

“For instance, the banks that have concluded arrangements to build the Qua Iboe power plant in Akwa Ibom State may no longer proceed with the project as it would no longer be profitable for them to do so,” a source said.

The proposed tariff structure saw residential customer category (R2) in the Federal Capital Territory, Nasarawa, Niger and Kogi states, served by the Abuja Electricity Distribution Company (AEDC) franchise, who previously paid N14 per kilowatt/hour, pay N23.60 per kilowatt/hour. Also, residential customers in Eko and Ikeja electricity distribution areas got a N10 and N8 increase respectively in their energy charges.

Same applied to residential customers in Kaduna and Benin electricity distribution companies, who experienced an increase of N11.05 and N9.26, respectively, in their energy charges.

Justice Mohammed Idris, in his judgement on Wednesday July 13, described the increase as “procedurally ultra vires, irrational, irregular and illegal,” prompting its reverse.