The Nigerian banking industry witnessed a significant 41% decline in non-performing loans (NPLs) last year, the National Bureau of Statistics (NBS) has disclosed.
The details
According to the NBS’s Selected Banking Sector Data for Q4 2019, which was released recently, banks’ NPLs dropped to N1.05 trillion in 2019, down from 1.79 trillion which was recorded during the preceding year.
The decline in NPLs is despite the fact that banks provided more credit facilities to the private sector in 2019, the NBS report noted. In specific terms, bank loans to companies in 2019 stood at N17.19 trillion, indicating a 4% increase when compared to total loan of N15.13 trillion that was disbursed to the private sector in 2018. Parts of the NBS report said:
”In terms of credit to private sector, the total value of credit allocated by the bank stood at N17.19 trillion as at Q4’19. Oil & Gas and Manufacturing sectors got credit allocation of N3.42 trillion and N2.62 trillion respectively, to record the highest credit allocation as at the period under review.”
[READ MORE: Nigerian banks face gloomy future over low oil prices, coronavirus)
What this means
The decline in banks’ NPL ratio is due to two possible factors: increase in loan recoveries and loan write-offs. This is according to Chudi Achara, a Management Associate at First Bank of Nigeria Limited, who spoke to Nairametrics.
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He further explained that another factor that must have helped banks to reduce NPL ratio is the decision to diversify their loan portfolios into other viable sectors such as manufacturing and export. According to him, banks’ decision to diversify followed the oil price crisis of 2014-2016, which resulted in an unprecedented increase in banks’ NPLs due to the inability of oil companies to pay back loans. He said:
“Many DMBs learnt from the crude oil price crisis of 2014-2016. During the oil boom, financing Oil and Gas was seen as more profitable. Therefore, banks put a huge percentage of their loan portfolios in that sector. Recently, banks have learnt to diversify into other sectors such as manufacturing and export. Focusing on financing short- term trade transactions rather than long term transactions has helped.
“More so, CBN’s recent focus on financing the real sector by increasing LDR to 65%, has seen banks lend more in recent times. This has increased the gross loans, with reference to the last MPC communique. And as you may know, the higher the increase in gross loans (as compared to Increase in NPL) will also reduce the NPL ratio.”
Will the reduction in NPLs determine banks’ decision to lend in 2020?
Achara stated that he does not believe that the reduction in the NPL ratio will affect banks decision to lend more really. This is because the decision to create risk assets is generally a business decision. In other words, such decisions are entirely dependent on the business strategy each bank wants to adopt. Different banks have their different risk appetites, he said. He, however, noted that Nigerian banks have a major role to play in ensuring that the economy recovers from the negative impacts of COVID-19.
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On the other hand, financial expert and Nairametrics’ economic commentator, Kalu Aja, believes that Nigerian banks’ loan forecast is negative going forward. He said:
“The forecasts going forward look negative with oil prices below $30. The Federation has failed to diversify forex earnings… Import substitution via border closure has been uncoordinated and non-eeffective.”
You may download the NBS report by clicking here.
