Standing Deposit Facility, 12 states

One would have expected that after the Asset Management Corporation of Nigeria (AMCON) took over the toxic loans in Nigeria, non-performing loans would be controlled more effectively by banks.

This does not seem to be the case as non-performing loans have started creeping up once more in the banking sector. A report from the National Bureau of Statistics indicates that Non-performing loans in Nigeria increased by N306 billion or 15% in the third Quarter of 2018 compared to the second quarter.

According to the said report, non-performing loans stood at N2,245,193,462,123.2 representing 14.16% of total gross bank loans in Nigeria. Nigeria’s Non-Performing Loans Ratio was 14.8% in Dec 2017, compared with the 12.8% ratio in the previous year. Nigeria’s Non-Performing Loans Ratio reached an all-time high in December 2009 when the ratio stood at 32.8% but its lowest was in December 2014 when it stood at 2.9%.

Compared to other countries, Nigeria’s non-performing loan ratio is quite high, only lower than that of countries like Cyprus, whose non-performing loan ratio stood at 38.9% as at June 2018 and Malawi, with non-performing loan ratio of 15.1%.

Among African countries, Nigeria is the country with the second highest non-performing loan ratio, Malawi being the African country with the highest. Argentina, with all of its economic woes has a non-performing loan ratio of 2% while China has 1.8%.

Impact of non-performing loans

A non-performing loan (NPL) is a loan that is several months overdue or in default. Most analysts use 90 days delinquency to measure non-performance of a loan A loan may become delinquent and therefore classified as non-performing because of economic misfortune.

While Non-performing loans may be an indicator of a debtor’s inability to pay, often times, it may indicate a debtor’s unwillingness to pay rather than the inability to pay. Many bankers have either lost their job or gone to jail because the debtor they approved a loan for refused to pay.

Whether a non-performing loan is as a result of inability to pay due to economic misfortune or unwillingness to pay, non-performing loans are a burden for both the lender, the borrower and the economy as a whole. For a debtor who borrowed with a collateral, non-performing loans traps such collaterals.

For the lender, non-performing loans imperils the capital requirement limits and therefore make it difficult to grant new and probably more quality credits. Non-performing loans weigh down a bank’s balance sheet and the attendant charge offs decrease a bank’s profitability. According to available research, countries with low non-performing loan ratio tend to experience faster GDP growth rate. Non-performing loans decrease banks’ willingness and ability to lend as the banks tend to spend time looking to recover on such loans than making new loans.

This creates yet another problem because bank lending is a catalyst for economic development, so much such that, a credit crunch arising from banks’ unwillingness to lend due to non-performing loans can create more of such non-performing loans if the needed economic growth and development is not realised because of such credit crunch.

A Stitch in Time Saves Nine: It might be worth the while for the CBN to begin to address this issue of non-performing loans now with a view to nipping the problem in the bud rather than waiting till when another AMCON buy out will happen. Banks should not be incentivised into believing that when they create the bad debts, they will be bailed out when the time comes.

The CBN should tie some of its credits and finances to the banks to their loan quality and non-performing loan ratio as a way to encourage them to tighten their lending policies and loan recovery drives.

Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. and (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.


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