Banks and nonperforming loans

The recent disclosure by the Central Bank of Nigeria (CBN) that the nation’s commercial banks recorded N400.57 billion in their Non-Performing Loans (NPLs) portfolio is disturbing. Such
huge bad debts have far-reaching implications on the solvency and profitability of the banks.
A statement by Dr. Sarah Alade, Deputy Governor, Economic Policy at the CBN revealed that the bad debts were recorded between August 2013 and August this year. This figure indicates an increase of N56.31bn or 16.36 percent, up from N344.26bn recorded within the same period last year. The statistics also show that gross loans by the banks increased by 21.03 percent from N9.278trn in August last year, to N11.229trn in August this year.

One of the immediate results of the high non-performing loans is a squeeze in the financials of the
banks, as a larger percentage of the banks’ gross earnings have reportedly gone into investment and interest, loan loss, personnel and other operational expenses. It is bad that the banks have such high impaired loans, which is an unsavoury condition in which an asset’s market value falls below its ceiling amount. In that case, recovery is minimal.
Consequently, liquidity risks set in. According to figures made available by the apex bank, by the end of August 2014, the banks had incurred a hefty N267.74bn in loans loss provision.
Expectedly, the unaudited profit before tax of the banks in the last nine months ending September, 2014, shows a marginal decrease to N385.67bn against N385.68bn in 2013. But the liquidity ratio of the banks declined from 50.6 percent at the end of December 2013, to 42.6
percent. This is largely due to the increased Cash Reserve Requirement (CRR).
Nevertheless, the Non-performing loans of over N400bn within a financial year, is alarming. It is a big strain on the banking system. This is, indeed, a warning that all may not be well with our banking sector. It also further signposts the need for close monitoring and tighter control of the banks.
It needs recalling that heavy “toxic loans” of about N4.3 trillion led to the insolvency of some banks and the subsequent sack of their helmsmen, few years ago.
The banks were eventually taken over by the CBN and handed to the Assets Management Corporation of Nigeria (AMCON).The economic meltdown which resulted from the bad debts of five years ago shook the banking industry.
The resultant loss of investors’ funds should not be allowed to repeat itself. Considering the important role of the banking industry in the economy, nothing should be left to chance. The banking regulatory authorities must ensure that the sector remains strong and sustains the confidence of depositors.
At present, confidence and trust in the sector appear to be waning. Any unfavourable happening in the sector is likely to have ripple effects on other sectors of the economy.
While the rate of NPLs and the resultant dip in profits could be as a result of a number of regulatory headwinds and the current state of the economy, the management of the affected banks should put in place effective mechanisms for the recovery of the loans. They should design a model for measuring their returns and risks.
At the same time, the banking regulators should consider intervening in the banks’ current high interest rate regime, as high interest on borrowing may have contributed to non-repayment of loans and the subsequent high non-performing loans portfolios.
Over all, the banks should put their houses in order to ensure their continuing liquidity. This has become expedient because liquidity crisis management requires careful and professional
planning. Since non-performing loans are an accounting nightmare, proper management of
loans portfolios is necessary, to ensure the continuing health and survival of the banks.