Every enterprise requires capital, funding for continued existence, sustainability and profitability; this often results in lending. However, in any given financial market, poor financial literacy, lack of due diligence by banks, ineffective policies, strained debt management institutions, bad faith and tardy dispute resolution, amongst other factors, result in proliferation of Non-Performing Loans (NPLs). Continued existence/thriving of the abovementioned factors invariably leads to bank and/or borrower insolvencies. In extreme instances, NPLs result in macroeconomic problems such as tight monetary liquidity, stifling of businesses/banks, and of course, economic disequilibrium or stagnancy.
The definition of NPLs differs from one country to another. However, opinions in some cases do match. According to the International Monetary Fund in its Compilation Guide on Financial Soundness Indicators of 2004 (paragraphs 4.84 – 4.85 thereof):
A loan is nonperforming when payments of interest and principal are past due by 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full…
This considerably acceptable international definition gives sufficient insight into the concept of NPLs; in that they refer to loan facilities which by relevant parameters are deemed to be ‘’irredeemable’’. Because of their propensity to disrupt even the largest economies, NPLs are globally recognised as cancers that must be pruned. By their very nature, they necessitate additional provisioning by banks aimed at reducing the Capital Adequacy Ratio (CAR) of the affected banks. Inevitably, unchecked NPLs lead to a systemic breakdown.
Whilst unavoidable or unforeseen occurrences may in plausible instances result in an NPL, more NPLs are offshoots of a number of avoidable factors. For instance, in recent times, the competitiveness of the banking sector almost singlehandedly forced some banks to adopt competition-driven lending policies with minimal attention to associated risks; thus necessitating the CBN’s formulation of policies aimed at improving the situation or in some instances, bridging the gap between the humungous risk appetite of some Nigerian Banks and the capital available at their disposal.
In the not-too-distant past, Nigeria experienced some banking crises, which were predominantly caused by the existence of too many NPLs in the system (such as the 2008/2009 banking crisis in Nigeria). These crises necessitated drastic reforms in the banking sector. For instance, though the Banking and Other Financial Institutions Act (BOFIA), which makes provisions on CAR for banks and dividend pay-out policy, the CBN has in times past issued guidelines and circulars on the issue of CAR.
Specifically section 13 of the BOFIA states that banks shall maintain capital funds unaffected by losses in such ratio to all or any assets; or to all or any liabilities or to both such assets and liabilities of the bank. Presently, the CAR for Nigerian banks is pegged at 10% and 15% for national/regional banks and banks with international banking license, respectively. Similarly, under section 16 of BOFIA, there are restrictions on payment on dividends by banks with insufficient credit. These ratios and restrictions are statutory and required to be adhered to, lest sanctions are meted out. Accordingly, by the BOFIA, non-adherence to the specified ratio/policy are sufficient grounds to prohibit a defaulting bank from advertising or accepting new deposits; paying cash dividends to shareholders; or granting credit and making investment. The BOFIA goes further to provide that; where a bank failed to comply with the above requirements, the license of such bank may be revoked by the apex Bank.
In furtherance of the above extant statutory position, in January 2018, the CBN issued a circular (REF:BSD/DIR/GEN/LAB/11/002) which is to the effect that banks that do not meet the minimum Capital Adequacy Ratio (CAR) or banks with a NPL ratio of above 10% should not pay dividend. Undoubtedly, this was aimed at helping banks maintain healthy credit statuses. Notwithstanding the creditable efforts of regulators and some stakeholders to avoid a relapse, it is rather unfortunate that in recent times, the NPL situation in Nigeria has not necessarily ameliorated. For example, according to Mr Lametek Adamu Edward, the CBN Deputy Governor, Corporate Services in publication dated June 24, 2019 in Thisday, the rate of NPLs in the banking sector was pegged at 10.95% in April 2019. This figure clearly falls way above the prudential limit of 5%.
Although the CBN’s response to the NPL situation has been commendable, the apex bank must be willing to maximise existing solutions and explore other ingenious or proven options, so as to fully arrest the situation. The need to give the NPL situation more attention is further lent credence by the fact that the Asset Management Corporation of Nigeria (AMCON) (a respite option for banks) may in fact be strained by the seemingly endless proliferation of bad loans. Even with AMCON’s monumental intervention in the banking sector, the ratio of NPLs to total loans in Nigeria seems short of global best practices, and the situation is unimproved. In fact, owing to the volume of NPLs, AMCON appears to have shifted its focus from buying more NPLs to the recovery of NPLs. According to the Director-General of the Corporation, Mr. Ahmed Kuru, in an interview with Punch Newspaper on October 28, 2017, the Corporation was no longer in the business of taking bad loans and was in need of liquidity to fund its own operations.
The situation we find ourselves in, calls for a more intensified and ingenious approach. Importantly, regulatory action towards addressing NPLs needs to be more focused on the management of existing NPLs, as well as preventive measures to avert the creation of more NPLs.
Some of the recommended options which should be considered are as follows:
Establishment of Private Asset Management Companies
This policy has been successfully implemented in a number of jurisdictions. The exact idea behind this strategic move is to drastically reduce the sole dependence on AMCON which appears to be stretched. The CBN circular of June 14, 2017, to banks and other financial institutions circulating an exposure draft of the framework for the licensing and regulation of private asset management companies is a significant step in the right direction and ought to be expedited.
Review of Policy Loan to Deposit Ratio for Banks
Loan to Deposit Ratio as it is known as a parameter for ascertaining the percentage of deposits in a Bank which are issued out as loans to borrowers; and vide a circular dated July 3, 2019 the CBN directed all Deposit Money Banks to maintain minimum Loans to Deposit Ratios of 60% by September 30, 2019. Whilst the industry of the CBN must be commended, it is noteworthy that the policy may serve as a catalyst for more NPLs because, whilst banks are geared to improve their Loan to Deposit Ratio (and avoid CBN’s sanctions) by giving out more loans, they are prone to paying minimal attention to risk, seeing that the policy might just heighten their risk appetites. Perhaps there is a need to re-evaluate this policy.
Resolute implementation of Corporate Governance Principles
Although one also cannot sever the contributions of borrowers/debtors to the current problem, it is also not possible to say that financial institutions are in perfect compliance with existing Codes of Corporate Governance. Accordingly, it is advisable that the enforcement of the extant Codes of Corporate Governance is more emphatic. Perhaps, the possibility of a Dispute Resolution Tribunal unique to the banking sector; and saddled with the responsibility of expeditiously addressing corporate governance infractions, is worth considering. It is pertinent that the resolute implementation of corporate governance principles be extended to borrower companies.
Improved economic state and liquidity
As casual as this may seem, it appears that a huge chunk of NPLs are as a result of sheer lack of capacity by borrowers. This may not be too distant from the flux state of the economy as a result of factors such as foreign exchange complications (for instance, unstable exchange rates). As such, whilst banks are urged to provide adequate cushions to hedge against exchange rate risk; government should strive more, to improve physical infrastructure, invest in human capital and technology and to make the business environment more friendly and suitable for growth.
Improved Financial Literacy
As has been noted earlier in this piece, financial literacy is crucial for the avoidance of unending NPLs. Whilst it is conceded that poor lending, rather than accounting or reporting results in NPLs, timely recognition of difficult loans and credit loss by banks will go a long way in ameliorating the problem.
Fast Track Court Process for NPL related suits
The backlog of cases before Nigerian Courts, the attendant delay in the adjudication of matters, as well as the sensitivity of some matters has necessitated the introduction of fast-track procedure by some superior Courts of record. The situation should not be different from disputes or suits pertaining to NPLs. It is recommended that relevant court rules give room for fast-track procedure on matters bordering NPLs. This is worth considering in view of the fact that some schools of thoughts opine that most excessively protracted debt recovery suits culminate into NPLs.
It has been contended that it is only normal for borrowers to occasionally default in the repayment of loans; thus the widely perceived position that it may be practically impossible to have zero NPLs in any economy. For the above reason, NPLs may perhaps be likened to a class of microorganisms who have been scientifically proven to be totally indispensable to the human body; and as such, they are bound to be present in the human body, albeit in limited quantities.
However, just as the human body (the host) reacts when the volume of such microorganisms grow out of control, a spate of NPLs in any given economy is likely to result in deep economic issues.
Government’s efforts are commendable, but the writer humbly posits that more can be done by the government and stakeholders to keep NPLs in Nigeria under check.