Spike in bad bank loans

The Nigerian banking system could be set for another round of crisis as bad bank loans have risen beyond the statutory limit set by the Central Bank of Nigeria (CBN). According to official reports, the ratio of Non-Performing Loans (NPL) to total bank credit which limit the CBN had set at 5%, rose to 11.7% […]

The Nigerian banking system could be set for another round of crisis as bad bank loans have risen beyond the statutory limit set by the Central Bank of Nigeria (CBN). According to official reports, the ratio of Non-Performing Loans (NPL) to total bank credit which limit the CBN had set at 5%, rose to 11.7% as at the end of June from 5.3% at the end of 2015. Already some banks have their excess of bad loans as high as 21%. Bad bank debts are loans which debtors have been unable to resolve or service beyond ninety days of stated terms of performance.
The situation is already having telling effects on the economy with the Gross Domestic Product (GDP) shrinking by 1.7%, and the non-growth dispensation leading to the ongoing full year recession, the first since 1991.  Linked to this development is the likely increase in credit risks as from the latter part of 2016, as more bank debtors may not be able to meet their debt servicing obligations leading to another season of debt crisis in banks. With the non-performance of the bad debts, the affected banks are unable to grant more loans to other would-be loan applicants who could have done better, thereby squeezing the economy of fresh investments and enterprise.
Even as the CBN governor Godwin Emefiele has assured that the economy remains stable, the lessons of recent economic history of the country point in a different direction. It is easily recalled how recently the CBN had a running battle with intransigent bad bank debtors which led to the name, shame and blame game in which the apex bank published the identities of the affected debtors and the furore that trailed the exercise. A situation where features of that unwholesome dispensation are creeping back into the economy cannot be in the best interest of the country.
Back in 2009, the very high level of non-performing loans in the banking system, and the imminent fall of some banks, led CBN to respond drastically, sack the bosses of five banks, take them over and then inject monies into them to keep them afloat. The Assets Management Corporation of Nigeria [AMCON] which was set up at the time and which took over such loans throughout the banking system is still grappling with the problem of failed bank debtors and its own multi-trillion naira debt. A similar solution may not be in the offing this time around.
Another reason for concern is the linkage between the spike in bad bank loans and the fall in the value of the Naira. Even the almost 40% devaluation of the Naira by the CBN has not helped matters significantly, as the shortage pressure on the forex market is not abating. Meanwhile the shortage in forex is due to both internal and external factors that have so far defied remediation by the government. On the external terrain forex shortage is caused by the fall in global oil prices which affects not only Nigeria but the whole world. The forex shortage has been deepened at home by the ongoing crisis in the Niger Delta region, which has seen a drop in the production of oil and diminished export of same.
This is where the response of the CBN in the situation demands more than mere assurances with doubtful prospects of sustainability. For instance following its discovery that its revised guidelines for reforming the nation’s forex market spawned a steep rise in hard currency loans, the apex bank ordered banks to write off all delinquent loans in line with its Prudential Guidelines for Deposit Money Banks in Nigeria of July 2010. Such knee jerk remediation measures may not be useful to the Nigerian economy in times like now.