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Tag: bad loans

  • ‘Inflation fuelling bad loans in microfinance banks’

    ‘Inflation fuelling bad loans in microfinance banks’

    The rise in inflation rate is raising the volume of non-performing loans (NPLs) in the banking sector, estimated at 15 per cent in many banks, the Managing Director, Accion Microfinance Bank (MfB) Limited, Taiwo Joda, has said.

    Speaking during an interview with The Nation in Lagos, the Joda said aside inflation uptick, which stands at 33.69 per cent in April, exchange rate volatility further contributed to diverse challenges facing many businesses, including high cost of operations.

    He advised businesses to be deliberate in their strategy to overcome challenges posed by the exchange rate and other unfavourable economic indicators.

    “At Accion MfB, we took a decision many years ago, that we will not take foreign loans. Also, if you go to the market today, you see that the prices of goods have gone up, some 20 per cent or event 30 per cent higher. Prices of products being sold by many of our customers have also gone up. So, what we see most times, are turnovers that are driven by inflation,” he disclosed.

    Joda explained that with rising inflation and high cost of goods, customers’ ability to payback borrowed funds has reduced, leading to surge in NPLs. He said that across Africa, it is obvious that NPLs are now in double digits.

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    He said that in most lending organisations, especially Microfinance banks, NPLs have gone up to double digits and as high as 15 per cent, which is a big challenge.

    The customers, he added also face the high cost of replacement of goods that sold, adding that as an import-oriented economy, the cost of doing business has gone up and that has negative impact on cost of goods.

    But in the midst of these challenges, he said the MfBs have to optimize risk management, to know who to do business with, and those they should avoid.

    “MfBs have to be cost efficient, adopt means to reduce cost significantly. For us, all our branches are on solar power, but solar can only act as a backup for electricity. In the first quarter of this year, so many micro-businesses died. Just imagine, if they had taken loans from banks, such loans could have also gone because there is no way to repay the loans. When the economy sneezes, Microfinance banks catch cold,” he said.

  • Three banks hold 60 per cent of N700b insider bad loans, says NDIC

    Three commercial banks have been identified to have in their balance sheets, 60 per cent of the N700 billion insider-related bad loans bedevilling the industry, Nigeria Deposit Insurance Corporation (NDIC) has said.

    Speaking yesterday at the Financial Institutions Training Centre (FITC) Thought Leadership Discussion Series in Lagos, NDIC Managing Director, Umaru Ibrahim said the level of non-performing loans (NPLs) in the industry could be lower if the banks were to adhere more to sound corporate governance.

    The identities of the banks were not disclosed, but the NDIC boss said that lenders without strong corporate governance culture were already being shunned by foreign investors because of the importance they attach to sound corporate governance practices.

    The Central Bank of Nigeria (CBN) expects banks’ NPLs not to exceed five per cent, but many lenders have grown their NPLs to over 20 per cent in recent months.

    The financial industry still harbours weaknesses in governance, as seen in insider non-performing loans, unreported losses, huge exit packages for directors, over-domineering executive management, contravention of regulatory/prudential guidelines and lending limits, poorly appraised credits and weakening of shareholders’ funds, among others.

    Speaking on the theme: Strengthening the Banking System and Facilitating Sustained Economic Growth: Roles of the Regulators, Operators and the Banking Public Ibrahim, who was represented by NDIC Executive Director, Operations, Prince Aghatise Erediauwa, said a large part of the NPLs came from loans to oil and gas sector. He regretted that many of the banks’ lending to key sectors of the economy do not have the right industry knowledge needed to properly assess the loans.

    “The bad loans we see today in banks are mainly due to large exposure to oil and gas sector. They expose themselves to the sector without the right industry knowledge. The banks go with the bandwagon effect, as once there is loan syndication, every lender will want to be part of it without understanding what is involved,” he said.

    According to Ibrahim, many of the banks are also undercapitalised,  borrowing from the  Central Bank of Nigeria (CBN). Many banks still do not disclose the names of all their staff that are involved in fraud, he said.

    He added: “A lot of oil and gas loans went bad and created huge NPLs. Banks were not knowledgeable of the oil and gas industry, telecom and power sectors. The banks are running helter-skelter instead of getting experts to handle the loans”.

    The immediate past President, Chartered Institute of Bankers of Nigeria, Segun Ajibola, also called for quality regulation and examination of banks to dictate poor corporate governance issues on time. “It is lack of corporate governance that will allow credit to go out without due approval. We need to tackle this challenge at the regulatory and operators levels to achieve the desired result,” he said.

    Also speaking, Managing Director/CEO, Sterling Bank Plc, Abubakar Suleiman, called for specialisation by the banks to enable them handle credits better. He also said that the high operational cost was affecting the rates at which banks give out loans.

    On corporate governance, he said: “Governance level in banks is high. For foreign investors, the corporate governance of sovereigns is far more important.  Governance should start from the sovereigns. There are states that are attracting World Bank grants. I have the largest bank in India as a shareholder and it is on our board.”

    Suleiman said banks should get incentives for lending to the real sector. “There should be reward system that promotes lending to real sector,” he said.

    To CBN Deputy Governor, Financial System Stability, Mrs. Aishah Ahmad, an efficient, well-functioning banking system is crucial for effective economic policy transmission. She said current estimates indicate that about 80 percent of activities in the financial system are driven by the banking sector, which underscores the need to strengthen it. “Strengthening the banking system requires joint effort from all stakeholders in the industry. As regulators, we are obliged to develop and enforce sound regulatory and supervisory policies, alongside speedy resolution of disputes to foster a stable financial system. Operators within the sector must ensure full compliance with regulations, be transparent in customer dealings and operate within a sustainable framework while the banking public should strive to be financially literate and leverage on more convenient e-banking channels,” she said.

    “Bank lending to the private sector is known to stimulate economic growth and development; however, private sector credit has remained low over the years in Nigeria. While we

    acknowledge the high risks in the economic environment, I would encourage our banks to partner with the CBN in financing the real sectors of the economy directly and through its various de-risking initiatives Lending (NIRSAL) and Development Finance Initiatives,” she said. such as the Nigeria Incentive-Based Risk Sharing System for Agricultural

  • Banks’ bad loans hit N856.9b, says report

    Banks’ bad loans hit N856.9b, says report

    Banks’ assets have depreciated in the last two years, with provisions for Non Performing Loans (NPLs) hitting N856.9 billion, a financial market report has said.
    The report by the investment and research firm Afrinvest West Africa Plc was released yesterday. It said provisioning for the NPLs, which rose 3.1 times from N280.4 billion in December 2014 to N856.9 billion last August, trimmed qualifying capital for mid to small-sized banks. The high concentration of forex denominated loans has nominally increased risk weighted assets following pressure on forex rate, it said.
    The report titled: “The Nigerian Economy and Financial Market 2016 Review and 2017 Outlook: Reform or be Relegated”, attributed the rise in NPL to foreign exchange (forex) crisis, low oil prices, which fell below trend production volumes and tight monetary policy, which plunged the economy into recession while the asset quality of banks has sharply deteriorated.
    These, the report said, were at the heart of a slow-burning solvency and liquidity crisis in the financial sector.
    It said the NPL ratio increased from 2.9 per cent in 2014 to 11.7 per cent as of June 2016, with the forecast it could rise to 12.1 per cent as at December 2016. The pressured portfolios of the banks include upstream oil and gas, general commerce, manufacturing and power sectors, which account for 48.1 per cent of total industry loan book.
    The report also said FBN Holdings, Diamond Bank Plc, Heritage Bank Limited, First City Monument Bank Limited, Union Bank of Nigeria Plc, Unity Bank of Nigeria Plc and Skye Bank Plc would either require fresh capital or aggressively capitalise their earnings to stay within prudential limits in the next one year.
    The Capital Adequacy Ratio (CAR) for banks that operate in Nigeria alone is 10 per cent, and is 15 per cent for lenders with offshore subsidiaries and 16 per cent for Systematically Important Banks (SIBs).
    Central Bank of Nigeria (CBN) spokesman Isaac Okorafor said he was yet to receive the report and would not comment. A spokesman of one of the banks said his lender would not source any fresh capital, but would rather capitalize its earnings. He pleaded not to be named.
    The report said: “In our estimation, seven banks- FBN Holdings, Diamond Bank of Nigeria Plc, Heritage Bank Limited, Unity Bank Plc, First City Monument Bank Limited, Skye Bank Plc – would need to raise capital or aggressively capitalise earnings to stay within prudential limits in the next one year.”
    According to the report, access to capital market for debt and equity financing remains tight due to the weak macroeconomic backdrop and investor sentiment even as profitability going forward will also be pressured as banks would be required to adopt International Financial Reporting Standards (IFRS) in reporting impairment charges from 2018.
    It said the new accounting policy is much stiffer in that it forces early recognition of impairments. “We forecast NPL ratio to stay in double-digit in 2017 as the macro pressures persist whilst the delayed but certain adjustment of the currency in 2017 will further increase provisioning cost,” it said.
    It said there were suggestions that regulators were considering another Asset Management Corporation of Nigeria (AMCON)-type bailout to acquire stressed assets, “but we doubt the feasibility of this, given the stretched finances of the federal government, already encumbered balance sheet of the CBN and the public backlash another bailout will generate”.
    The report said the impact of the above factors had put pressure on the CAR of banks across all Tiers with four lenders currently below or at threshold of regulatory limit.
    “To create a soft landing for banks and stabilise the financial system, the Central Bank of Nigeria (CBN) recently issued a regulatory guideline to allow a one-off write-off of already provisioned loans before the mandated one-year period. The CBN also took over a Tier-2 lender, Skye Bank, which fell four percentage points below the mandated CAR limit and below liquidity ratio guidelines.”

    “The management of the bank was changed while the CBN injected N100 billion of liquidity to prevent a run on the bank. We also understand that a sizeable portion of the bank’s oil and gas loans have been restructured and the quality of the portfolio should significantly improve in subsequent months as oil prices rally,” the report said.
    Continuing, it said despite the above situation, it did not believe that risk to financial system stability has materially reduced on account of the level of provisioning, both for restructured and un-restructured assets, is not adequate with Loan Loss Reserve/Non-Performing Loan ratio currently below 50 per cent and at a six-year low.
    The report said Nigeria’s business cycle would be highly dependent on the ability of policy makers to deliver incremental oil output in 2017, restore macroeconomic stability by rebuilding confidence in monetary policy and the administrative side of the forex market structure as well as showing commitments to structural reforms.
    Afrinvest believes that activities in the Nigerian economy in 2017 will be broadly dependent on the Federal Government’s resolve to implement tough but necessary structural reforms in order to recalibrate the economy towards a path of recovery and rebuild confidence in monetary policy.
    Said the report: “We note that oil prices which had hitherto overwhelmingly driven Nigeria’s business cycle will play a reduced role in the medium term. Despite the recent OPEC/Non-OPEC deal to cut production volumes, the balance of oil resources (between conventional low cost-drillers in OPEC countries and increasingly resilient and efficient shale producers) as well as diversification into clean energy in advanced countries suggests that structurally, the era of more than $80.00/b oil is over.”

    It said the short to medium term outlook would be highly dependent on the ability of policy makers to deliver incremental oil output in 2017 while also reviewing the current structure of the currency market. “The 2017 budget, which is broadly optimistic, given current macroeconomic realities, will require the focused commitment of both the Executive and Legislative arms of government in order to get passed into law so that timely implementation can begin to achieve the objective of stimulating economic recovery through increased infrastructure spending,” Afrinvest said.

  • CBN orders banks to build buffers against bad loans

    CBN orders banks to build buffers against bad loans

    •Banks’ credit with CBN hits N622b

    The Central Bank of Nigeria (CBN) has ordered deposit money banks to double provisions on performing loans to two per cent to build adequate buffers against unexpected losses.

    General provisions on performing loans had been fixed at one per cent before the new regulation, said the CBN circular which came into effect last week.

    “In recent times, the adverse macro-economic environment has been a source of concern in the financial sector,” the bank said.

    Meanwhile, the interbank lending rate held steady for the second consecutive week at 0.5 per cent after the CBN injected matured Open Market Operation (OMO) bills into the system, traders said.

    Banks’ credit balance with the CBN opened at N622 billion ($3.13 billion) on Friday, compared with a surplus of about N514 billion last week.

    The secured open buy-back (OBB) – the rate at which lenders can borrow from the interbank market using treasury bills as collateral – held steady at 0.5 per cent same level last week, far below the CBN’s 13 per cent benchmark interest rate.

    Traders said about N179 billion in matured OMO bills was injected into the system on Thursday. They also expected an unspecified amount of refunds from cash that banks had deposited with the central bank for forex purchases to hit the banking system on Friday.

    Traders said although about N70 billion for bond purchases and N18 billion debited for cash reserve requirements left the system on Friday, the market remained substantially liquid.

    “The market is highly liquid and we are not seeing any change in the lending rate at the interbank market in the near term unless the central bank resumes the issuance of OMO bills as is being speculated in the market,” one dealer said.

    A few commercial lenders were transacting overnight placements at one per cent on Friday, the same level last week, but most are still insisting on secured lending, traders said. “We expect the system to remain liquid next week and interbank rate trading at the prevailing level,” another trader told Reuters.

     

  • Bank votes N3.1b for bad loans

    • Deposits down to N796.5b

    A chunk of Fidelity Bank’s profit was cut by a N3.1 billion provision for bad loans between January and last month, an analysis has shown.

    The analysis of the bank’s half-year result for last month showed that Profit After Tax (PAT) grew by 39 per cent year-on-year to N4.3 billion, despite recording a flat Profit Before Tax (PBT) which stood at N4.96 billion year-on-year.

    Head of Markets at FBN Capital Limited Olubunmi Ashaolu said the bank reported a negative result of (N1.2 billion) on the other comprehensive income line in half year ended June 2014 against N39 million during the same period in 2015.

    He explained that Fidelity’s sizeable impairment charges is similar to that of other banks that have reported their second quarter 2015 results. This has confirmed worsening asset quality position for most banks due to the weak macro conditions.

    “When annualised, Fidelity Bank’s second quarter 2015 provisions of N3.1 billion imply a cost of risk of 1.2 per cent. This is higher than the 0.7 per cent cost of risk that the bank reported in the first quarter of this year, and is slightly higher than management’s guidance of one per cent for the full year. Further up the Profit and Loss, both revenue lines contributed strongly to the 20 per cent year-on-year expansion in profit before provision,” he said in an emailed report.

    He explained that funding income, which advanced by 22 per cent year-on-year, was the stronger of the two, helped by relatively high yields, a five per cent quarter-on-quarter expansion in the loan book and a three per cent quarter-on-quarter decline in deposits.

    Ashaolu said Fidelity Bank’s first half PBT of N9.7 billion appears to be tracking ahead of consensus 2015 PBT of N14.8 billion. However, its 2015 return on average equity (ROAE) performance of a company over a financial year, of 8.1 per cent is less compelling than the 16 per cent average for the banks.

    Although profit before provisions was up by 20 per cent, a rise in loan loss provisions and a 15 per cent year-on-year rise in operating expenses led to a flattish year-on-year PBT. A loan loss provision is an expense that is reserved for defaulted loans or credits. It is an amount set aside by a bank to cover potential losses on loans.

    Sequentially, the bank’s PBT grew by five per cent quarter-on-quarter. In contrast, PAT declined by 14 per cent quarter-on-quarter mainly because of a significant reduction in other comprehensive income.

    The bank’s Managing Director/CEO, Nnamdi Okonkwo, said businesses were challenged by a difficult operating environment, weaker government revenues, a tighter monetary policy environment during the first half of the year.

    He explained that the bank’s Net Fee Income increased by 25.9 per cent year-on-year to N15.2 billion but declined by 25.6 per cent quarter-on-quarter due to lower forex income on the back of trading restrictions in the market.

    Total Deposits declined by 2.9 per cent year-to-date to N796.5 billion and 0.1 per cent quarter-on-quarter as tighter monetary policy and the Cash Reserve Ratio harmonisation increased effective funding costs.

    “With Private Sector Depositors accounting for 87 per cent of our deposits, we sterilised an additional N21 billion due to the CRR harmonisation. Though Interest expense increased by 9.1 per cent year-on-year, it declined by 1.9 per cent quarter-on-quarter due to the diversification of our funding sources,” he said in a statement.