Curbing banks’ non-performing loans

Curbing banks’ non-performing loans

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The non-performing loans in the banking sector rose to N814 billion at the end of 2021, representing 3.16 per cent increase from the N789 billion in 2020. The bad loans were accumulated by nine frontline banks in the country. According to the financial reports recently released by banks, in the first half (H1) of 2023, non-performing loans (NPL) by four leading banks in the country rose to N478 billion. This is attributed to the current economic downturn. The financial reports also showed that the gross NPL ratio reached 4.85 per cent during the 2021 financial year.

However, at the end of 2021 financial year, the total bad loans accumulated in the banking sector remained stable, within 5 per cent NPL ratio stipulated by the Central Bank of Nigeria (CBN). This was as a result of forbearance or concessions to borrowers adjudged to be unlikely to repay their loans under the current terms and conditions given to them by their banks. Under the terms of restructuring their loans, the downstream sector of oil and gas reportedly benefited from the N7.2 billion write-off of bad loans in the 2021 financial year as its NPLs improved to 8.6 per cent from 11 per cent in 2020.

No doubt, a healthy flow of credit is the lifeblood of the economy and bad loans are indicators of emerging crisis in the sector and the entire economy. That is why there are concerns over rising bad loans in the banking sector. The capital inadequacy in the banks might be responsible for banks’ borrowing of N12.46 trillion from the CBN in eight months of this year. Lack of adequate punishment for defaulters is responsible for rising bad loans in the banks. The lacuna may have encouraged high-profile bank customers to become debt dodgers.

Curbing banks’ non-performing loans

The amount of bad loans recorded in 2021 and the first half of this year would have been much higher, if some of them had not been written off. As a result of the rising bad loans, most banks are unable to provide credit to customers. The development has reduced the profitability of the banks. The rising bad loans can lead to bankruptcy in the sector. Considering that the sector is the pillar of the economy, any shock in the sector will certainly affect the financial system and the economy. Nigeria cannot afford bankruptcy in banks now that the economy is in dire straits.

Despite posting high profits before tax, some of the leading banks have very high NPL by value. This represents an increase of 4.3 per cent from the amount recorded three years ago during the COVID-19 pandemic. Among the nine big banks, three reported the highest volume of NPL, while one reported the lowest. We decry the rising bad loans in the banking system and urge the banks to find measures to reduce the trend.

Failure to curb the rising bad loans in the banks could lead to the collapse of the sector and the economy. Therefore, the banks should be wary of the rising NPLs in their operations and strive to reduce them. Any instability in the banking sector will hamper their profitability. Let the banks ensure that loans have adequate collaterals. The collapse of some banks in the late 1990s that resulted in mergers and acquisitions (M&A) and subsequent recapitalisation of banks should make the banks sit up.

Let the banks be strict in adhering to lending rules and regulations. Non-compliance with such regulations often leads to bad loans. The banks should be strict in the enforcement of loan repayment, including advances to their directors and friends. It is vital that bank directors should, when the need arises, provide the necessary advice that will guide management in curbing bad loans.

Similarly, the CBN and the Nigeria Deposit Insurance Corporation (NDIC) should closely monitor the audit reports of the banks to ensure their solvency. We say this because bad loans can significantly hamper the financial stability of the banks. Besides, let the banks evolve efficient and pragmatic measures to enhance recovery of loans. We believe that doing so will reduce the high rate of non-performing loans in the sector.