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Banks battle with new wave of non-performing loans

By Babajide Komolafe
Banks are battling with a new wave of non-performing loans occasioned by the ongoing credit freeze and slowdown in economic activities.

“Accounts that were performing before had become non-performing as a result of the problem in the industry,” a senior banker and departmental head told Vanguard last week.

Investigation revealed that the fresh wave of loan default started in the last quarter of 2009 and became aggravated in the last two months. Bankers confirmed to Vanguard that most of the new loan defaulters are businesses or individuals whose businesses were directly or indirectly linked to the banking industry. These businesses which were either service providers to banks or to bankers started experiencing decline in patronage in the October as banks began to cut cost and lay-off staff. As a result they suffered steep drop in revenue hence they couldn’t meet up with loan repayment schedule.

These companies, according to a banker are even struggling to survive and repaying bank loan is not even a priority for them.”Some of them have also retrenched in to cope with decline in turnover”, he said.

This, investigation revealed has become a source of concern for banks. “The meaning is that we have to do more provisioning for non-performing loans, resulting to more losses than was declared last year”, a bank treasurer said.

“What we are seeing is the multiplier effect of the banking reforms. Now because the banks and bankers are not spending, other businesses are suffering lack of patronage and sacking staff. But it is also aggravating the problem in the industry as those of them that took bank loans cant repay and thereby worsening the problem of banks”, he added.

The impact of the credit freeze on businesses was confirmed by the Monetary Policy Committee (MPC) of the CBN at its last meeting. The Committee observed that the slowdown in banks’ lending occasioned decline in economic activities in the first quarter with gross domestic product (GDP) falling to 6.68 per cent from 8.23 per cent in last quarter of 2009.

“Banks refusal to grant credit is still haunting the economy and constraining the revival in trading activities”, said Mr. Bismark Rewane, Managing Director/Chief Executive of Financial Derivatives Company Limited.

In Monthly Economic News and Views presented at Lagos Business School Executive Breakfast Meeting  recently, he noted that, “Total value of cheques cleared in Lagos area was down 14% to N881bn in February while average inventory levels has increased for non-essential items like electronics and cars. For electronics, inventory levels have doubled from a maximum of 45days to 90days. Automobiles have gone up from a maximum of 3-6weeks to about 3 months. Property values fall sharply”.


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