Bank directors and the N1.85tr bad loans

Umaru Ibrahim, managing director of Nigeria Deposit Insurance Corporation (NDIC) ripped open the state of the Nigerian banking industry to members of the House of Representatives Committee on Insurance and Actuarial Matters the other day and it is a sorry state of affairs, especially as far as insider abuses are concerned. The arithmetic is ominous and the portents are dire. Urgent steps must be taken to stem the tide lest some unscrupulous privileged persons destroy the nation’s banking industry.

Ibrahim disclosed that, of the N1.85 trillion non-performing credit facilities (that is, 10 per cent of the total credit portfolio of N18.53 trillion) in the 25 deposit money banks (DMBs) in the country as at the end of December 2016, bank directors accounted for 40 per cent or N7.41 trillion. He however, did not disclose the level of deposit liabilities in the 25 banks for the same period.

Ibrahim also disclosed that in the 42 primary mortgage institutions (PMIs) with a total deposit liability of N69 billion, the total credit portfolio was N94 billion as at end of December 2016 (meaning complete erosion of customers’ deposits). Of the N94 billion debts, N51.7 billion or 55 per cent was non-performing. The directors of PMIs were responsible for 45 per cent or N42.3 billion of the total loans in the PMIs.

In the microfinance banking sub-sector which has 978 licensed operators as at end of December 2016, the deposit liability was reported to be N158 billion while the total credit facilities amounted to N195 billion (another case of complete erosion of depositors’ funds). Of the N87.75 billion non-performing credits (that is, 45 per cent of the total credits in the sub-sector), N68.25 billion or 35 per cent of the non-performing credits belonged to directors of the banks.

Although Ibrahim summarised his review of the Nigerian banking industry as ‘having strong fundamentals in regulatory assessment and rating’, he nevertheless, acknowledged that regulators were concerned about the rising trend of non-performing loans, poor earnings, erosion of shareholders funds, corporate governance and erosion of public confidence in the banking system. He rightly called for ‘strict compliance with existing code of ethics for bank directors and a review of existing laws and regulations to impose serious sanctions on directors who exploit their positions and default in the repayment of their credit facilities while still retaining their positions as directors in their banks.’

A critical analysis of the information given by the NDIC’s chief executive more than justifies a deep concern not only by the regulators on ‘erosion of shareholders funds’ but by the entire stakeholders on the ‘erosion of depositors funds.’ In the MFB and PMI sub-sectors, for example, the entire credits are far above the total deposits. What Ibrahim described as over-lending actually means that the entire deposits made by customers had been lent out to borrowers. Beyond that, repayment of the loans, even the ones borrowed by bank directors, has become questionable.

What he did not tell the members of the House is that in various sub-sectors of the banking system, bank directors’ non-performing credits relative to the total non-performing ones was scandalous and dangerous at 40 per cent (N.74 trillion of N1.85 trillion) in DMBs; 77.8 per cent (N68.25 billion of N87.75 billion) in MFBs; and 81.8 per cent (N42.3 billion of N51.7 billion) in PMIs. Viewed from this angle, liquidity in MFBs and PMIs is seriously constrained. And if, for any reason there is failure in meeting depositors’ cash withdrawal demands, another history of bank distress and failure or mergers and acquisitions may ensue. It is doubtful if this country can afford such a situation under the prevailing economic environment. Thus, bank directors are the greatest threat and risk factor to the safety, soundness and stability of the Nigerian banking industry. The industry’s well-meaning stakeholders must urgently find ways to deal with this menace as, otherwise, the bubble may soon bust.

In strict terms, non-repayment of loans by bank directors amounts to insider abuse, violation of corporate governance and best practice rules, unethical and unprofessional practices, exploitation of the banking system via their privileged positions, and crowding out bank customers who would have borrowed and repaid their loans. Most importantly, it is a serious economic and financial crime.

Granting that banks provided regulators correct credit data (past experiences urge some caution in believing they did) against which Alhaji Ibrahim made his revelations and that all the director-related loans are backed by acceptable credit collaterals, the three crucial questions that must be asked are: What did the directors do with the money they borrowed? Why are they not repaying the credits? Were the loans collaterised? It is the duty of CBN and NDIC, regulators and supervisors of banks, to investigate and obtain credible answers. Such investigation should also determine whether the facilities were properly processed in line with credit principles, policies, laws and regulations; whether the monies were appropriately deployed for the declared purposes; the certainty of sources of repayment; and that there were adequate collaterals.

For the bank directors to have stripped their banks dangerously bare, shows there must have been regulatory and/or supervisory failure; meaning that CBN and NDIC were not alive to their responsibilities. Well, the oil has already spilled and must now quickly be cleaned. It is not enough for CBN to direct banks to publish in the newspapers the names of bad/chronic bank debtors in a bid to ‘name and shame them’ and compel them to pay their debts. Most of the debtors, unfortunately, have no shame at all and so, that strategy will not elicit repayment of the loans. The laws of the land are meant for everyone, including the shameless and unrepentant bank directors who ought to show good examples. They owe their banks huge amounts of money and yet at the end of each financial year they collect mouth-watering dividends. Worst still, they retain their board membership.

The debtors should be subjected to the dictates of the law commencing with using their dividends for repayment of the facilities, selling their shares in the banks, foreclosing and selling assets used as collaterals and, where necessary, charging them to court for economic and financial crimes.

Henceforth, directors should be precluded from borrowing money from banks on which boards they sit. They should go to other banks to process their credit needs. Those bad debtor directors should be relieved of their board membership. Bank Verification Numbers (BVNs) and Credit Bureaus should be used effectively to check serial borrowings from the banking system by individuals and organisations. Banks must be restricted from lending money to politically exposed persons many of whom are bank directors because in many cases, money such people or their companies is like money in ‘gamblers’ hands’ and chances of recovery are difficult, if not impossible. The regulators and supervisors must actively monitor and control banks from high risk practices. They should also ensure that bank directors’ loans are not written-off.

The debts must also not be sold to Asset Management Corporation of Nigeria (AMCON) where the directors may go to negotiate and pay pittance in settlement of their huge debts. The insider abuses by directors must not be allowed to fester otherwise they will destroy what remains of the banking system in Nigeria.Indeed, it is high time those who toy with the safety, stability, sustainability, growth and development of Nigeria’s banking system and by extension the entire economy were visited with deterrent life-long sanctions.