The Central Bank of Nigeria (CBN) has reportedly given a directive to commercial banks for the immediate suspension of interests on the N777 billion non-performing loans to oil marketers.
Sources disclosed that the move by the CBN was informed by the worsening portfolio of non-performing loans to oil marketers in the country. According to the report, the failure of the Federal Government to pay fuel subsidy to oil marketers has worsened non-performing loans (NPLs) in recent times.
Further details: Confirming the development, the Managing Director of SunTrust Bank Limited, Ayo Babatunde disclosed that there was a 100% suspension of income on the oil marketers’ loans by banks. Babatunde reportedly said this while speaking at a seminar organised by the Money Market Workgroup of Financial Market Dealers Association (FMDA) in Lagos.
- According to the director, CBN might have taken the action to ensure that banks did not report paper profits on NPLs.
- Meanwhile, Babatunde further raised concern over the CBN policy, mandating banks to lend 60% of their deposits by September 30. He revealed that the move might push some of them to increase lending to high risk-borrowers, with the potential of incurring heavy losses.
“The guideline directing banks to improve lending to the real sector and maintain a minimum loan to deposit ratio (LDR) of 60% (compared to the sector’s LDR of 58.5% as at May and a regulatory maximum of 80%), is subject to quarterly review.
Failure to meet the minimum LDR of 60% by the specified date will result in a levy of additional Cash Reserve Requirement (CRR) equal to 50% of the lending shortfall of the target.
We need to clarify whether earlier exposure to the preferred sectors can be aggregated for the LDR computation and likely forbearance to banks with high NPLs to the preferred sectors, such as SMEs, retail, mortgage, and consumer lending.”
Why CBN is worried: A look into the NPLs data as released by the National Bureau of Statistics shows that the total NPLs stood N1.69 trillion as of April 2019. Considering the total gross loans of N15.4 trillion, it means that non-performing loans constitute 10.83% of total gross loans.
- The breakdown shows that as of April ending, Nigeria’s oil and gas sector accounted for over 60%. Specifically, the NPLs accrued to Nigeria’s oil and gas sector was estimated at N777.84 billion.
- A closer look at the data reveals that the non-performing loans in the oil sector declined by 93.3 billion as at the end of April 2019.
- Nairametrics had earlier reported that contractors and investors in the sector had largely depended on bank loans to manage their operations, with many defaulting to pay up.
Key Takeaways: The directive from the CBN to freeze all the interests banks get from the non-performing loans offered to oil markers means NPLs are now a big source of concern to the economy.
- The CBN may be planning to clamp down on banks that have shady deals surrounding the issue of the non-performing loan which has continued to linger.
- This is a move by the CBN to consolidate its move to redirect loan facilities to the real sector.
- Also, this may be a coordinated move to stop accumulated interests, and clamp down on the debtors to recover loans for the banks.
- While it remains unknown if the new policy will affect loans granted to other sectors, banks may lose returns on interests which may run into billions.