By Babajide Komolafe
2016 was a year Nigerian bankers would not want to experience again. It was the year the industry suffered heavily from the worst nightmare of bankers- bad loans.
According to the Financial Stability report of the Central Bank of Nigeria, CBN, banks recorded N1.02 trillion bad loans in the first half of 2016. “Non-performing loans (bad loans) in the period under review grew by 158 per cent from N649.63 billion at end-December 2015 to N1.68 billion at end-June 2016”, the CBN stated.
As a result, the ratio of bad loans to total loans more than doubled to 11.7 percent in the first six months of the year from 5.3 percent at the end of 2015. This implies that for every N100 of loan granted by banks, borrowers could not repay N11.30.
Economy in recession
The above was caused by the persistent general decline in economic activities or economic recession experienced by the country during the year. Economic recession according to experts is defined as two consecutive quarters of negative GDP growth. According to the National Bureau of Statistics, NBS, economic activities as measured by the gross domestic product (GDP) declined by 0.36 percent in the first quarter, 2.06 per cent in the second quarter and 2.24 percent in the third quarter. These imply Nigeria experienced economic recession in 2016.
Furthermore, the CBN’s Purchasing Managers’ Index for November, revealed that production level in the manufacturing sector and business activities in the non-manufacturing as well as employment level in both sectors declined consistently from January to November.
Loan defaults: The decline in economic activities resulted to lower revenue and losses for many businesses and hence they could not repay loans borrowed from banks. This is reflected in the CBN’s credit condition survey for the fourth quarter, which stated: “Corporate loan performance as measured by the default rates deteriorated in the review quarter. Default rates on lending to all sizes of businesses deteriorated in Q4 2016. Lenders had mixed opinions on default rates in the next quarter; they were of the opinion that default rates for the medium and large PNFCs will improve, while the default rates for the small businesses and OFCs will further deteriorate.”
Also, the CBN in its Financial Stability report of Q1 2016, predicted further increase in bad loans in the second half of the year. It stated, “Credit risk is expected to trend higher into the second half of 2016 owing to increased loan impairments resulting from the depreciation of the Naira and inability of obligors to service foreign loans”.
The implication of the above is that the banking industry may have lost over N2 trillion to bad loan due to the impact of the economic recession on businesses and individuals across the country.
According to Dr. Biodun Adedipe, Chief Executive Officer, Biodun Adedipe Associates, “The ultimate aim of lending is the collection of the loans and other facilities granted, along with the servicing by the borrowing customers. As such, the current and expected states of the economy have great impact on the lending activities of banks and the safety of risk assets.
Foreign Exchange challenge: In addition to loan losses, banking business was also constrained by shortage of foreign currency. With monthly dollar inflow dropping below $1 billion in 2016 from $3.2 billion due to decline in crude oil prices, the country battled with shortage of dollars to finance its monthly import bill of over $4 billion. As a result, businesses could not access dollars to import raw materials needed for production which in turn reduced banks’ income from import financing. “Businesses are still hurting from the spasmodic supply of dollars whilst reporting staggering losses,” noted Mr. Bismarck Rewane, in his review of the economy in November.
The scarcity of foreign exchange, according to Deputy Managing Director, First Bank of Nigeria Limited, Mr. Gbenga Shobo, posed a major challenge to banks during the year.
He said, “Lack of foreign exchange has been the major problem since we import almost everything in the country. Factories have to bring in raw materials. As far as there is no money to bring in those raw materials, capacity utilization for some of these manufacturers has dropped to about 35 percent and this will definitely reduce banks turnover.”
Rising inflation: Banking business was also affected by rising inflation in 2016. According to the NBS, inflation rate rose from 9.55 percent in December 2015 to 18.44 percent in November 2016. In response, the CBN further tightened money supply, increasing the Monetary Policy Rate (MPR) first to 12 percent in March and then to 14 percent in July. In addition, the CBN increased the Cash Reserve Ratio (CRR) of banks to 22.5 per cent from 20 percent. This translated to 300 basis points increase in the MPR and 250 basis point increase in the CRR. While the aim was to attract more savings into the banking system and dollar investments into the economy, these moves, however, led to the withdrawal of about N2 trillion from the banking system, thus reducing the money available to banks to do business. It also increased their cost of funds, which translated to reduction in interest rate margins. According to the CBN, interest rate contributions (interest margins) to total income of banks declined to 54.3 percent in the first half of 2016 from 63.8 percent in December 20015.
Rating Downgrade: Though the huge bad loans were occasioned by the impact of the economic recession, it however undermined confidence in the Nigerian banking sector, prompting global rating agency, Fitch, to downgrade its rating of nine Nigerian banks from B+ to B-. The company stated, “implication of the downgrade meant that more loans that could not be recovered in the next 10 years dominated the system such that creditors can no longer rely on receiving full and timely extraordinary support from the Nigerian system, if any of the banks became non-viable.”
To reduce the impact of the loan loss on the performance and financial health, most banks resorted to cost cutting measures including staff retrenchment, reduction in lending activities, and reduction in staff salaries.
According to Alhaji Musa Umar, Director, Research, Policy and International Relations Department, Nigeria Deposit Insurance Corporation (NDIC): “The financial sector appears to be having its own fair share of the effect of economic recession, as a number of banks are experiencing poor asset quality and increase in non-performing loans, resulting in downsizing of staff, reduction in staff salary, etc.” According to banking sector analysts, about 3000 bank workers lost their jobs in 2016 due to the wave of staff retrenchment triggered by the recession.