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Banks’ non-performing loans: managing the losses

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Banking hall

Banking hall

While some banks have been declaring huge profit and lining shareholders’ pockets with impressive dividend on investments, others are not so lucky, as they are performing poorly in this regard. What could have been their profit was eroded by bad debt, which they had to reschedule or write off entirely.

Some of the loans were taken without clear collateral, which could have been used to at least recover part, if not all the loans. Some of the loans were already doomed from inception due to internal corruption. Some corrupt officials, according to investigations, are known to take part of the loans as gratification, thereby assisting beneficiaries to avoid payment.

The Central Bank of Nigeria (CBN) alerted that non-performing loans in the banking system are rising, as a result of the economic downturn.
Director of banking Supervision, Mrs. Tokunbo Martins made this known during the 326th meeting of bankers’ committee held recently in Lagos.
Said she: “We all know there has been an economic downturn and things are hard presently. We have spoken about fallen oil prices. So, non-performing loans going up is not unexpected, it is normal. If people are not being paid their salaries and are thus unable to pay their loans, it is not unexpected. If corporate bodies are not doing well as they used to and are not able to pay their loans, it is not surprising that non-performing loans are rising. The average figure of five percent non-performing loan is not out of this world.”

Continuing, she said, “on the other hand, it is not really that we are resting on our laurels, the bankers’ committee did discuss it. We spoke about such things as debt factoring. This is not something that has been done yet, but there were some discussions about it.”

Some of the banks said although the phenomenon has affected overall profit, it has not affected their liquidity in any way. They said non-performing loan is not a threat to the banks yet.

Fidelity Bank admitted that it has since intensified effort at recovering loans, adding that precautionary measures have also been put in place to ensure pay back, as well as prevent a re-occurrence.

The Chief Operation and Information officer of the bank, Gbolahan Joshua explained that the bank’s management has since intensified efforts aimed at reducing its loans portfolio by setting up specialised department for loan monitoring and collection.

“Were have Relationship Managers/Teams with the primary responsibility of monitoring every debt and also spearheading the recovery of all bad debts under their purview. The Bank also has a well-staffed Loan Monitoring Department, where all loans are monitored daily and delinquent loans escalated to the Executive Management. Besides, regular executive review sessions are held periodically to review any delinquent loan. The bank also has a dedicated recovery team known as Remedial Management Group with the responsibility of recovering bad debts with assigned targets,” he said.

On the effect of non-performing loan on the bank, he said: “Our total impairment charge in 2015 Financial Year (FY) was N5.7bn. This amount would have been part of our profit for the year, if our loan book were 100 percent unimpaired. The bank wrote off N2.7b as bad loans in the 2015 financial year. This amount has been fully provided for through Profit and Loss, which means, if the loan is recovered anytime in the future, the total amount will be written back to profit and Loss, forming part of the profit that will be declared in the financial year it occurs.”

On the issue of internal conspirators, whose activities have been preventing recovery of bank loans, he said: “This does not apply to Fidelity Bank, as all loans are reviewed by an independent team. The bank implements the highest level of corporate governance in creating loans.”

President, Association of Banks, Insurance and Financial Institution (ASBIFI), Sunday Salako said rising bank debt is a result of current economic melt down affecting businesses. He explained that organisations are failing to meet their obligations to banks because of the harsh economic environment.

“The economic situation is bad. Factories are not working at optimal level, and companies are closing down. If you are not producing, the power problem is there. Many of them cannot sustain running cost, so they are really packing up, and those managing to produce cannot sell, because people’s purchasing is so weak. So, what do we expect when after borrowing money from the banks they are not meeting their obligations. You can see why debts are rising.

“If everything is okay, we may say they are very reckless, but in this case, they have done everything, invested, but policies and operating environment are very hostile. What can the person do? He won’t kill himself. Until this downturn is abated, that is when our economy will also pick up. As it is, everything is at its lowest, even the budget has not been passed, so how do you plan or make forecast?

“Many people will borrow to import certain things with the hope to sell, make gains and return bank’s money. But the thing is that they have imported and people are not buying; some have produced, and cannot sell,” he lamented
Authoritative source at one of the banks gave a further insight into the problem. He explained that though banks’ problems vary from low deposit to bad debt, internal conspiracy has compounded the whole issue.

In his opinion, since the implementation of TSA policy, banks’ liquidity has depreciated, making it difficult for them to perform crucial obligations to customers and stakeholders.

“Liquidity capacity was adversely affected because of the TSA implementation. Because of mop up of cash from banks, our lending capacity has reduced, which naturally has also affected our profitability because we lost the interest that could have been collected on the loans,” he said.

The source, an Assistant General Manager with a new generation bank, said loans were given to some powerful Nigerians considered as “sacred cows” without tangible and verified collateral.

“Some powerful Nigerians obtained loans and just won’t pay up. They knew from day one that they wouldn’t pay because of internal connivance. These debtors had given part of the loan as gratification to some staff in order to circumvent the procedure. That is why many of them have no tangible collateral and there is no way you can force them to pay. On the long run, such loans are classified as bad debt. We have rescheduled and extended many of them. But the more you reschedule, the more you will be eating into your profit margin. Even the method of loan recovery, which the Central Bank introduced, is not working. It is impacting negatively on many of the banks. I mean the ‘name and shame’ method of loan recovery. It has brought many of the banks into litigation, as many of the personalities whose names we published had divested from the companies alongside which their names appeared. This is a major challenge,” he said.

Another source confirmed that conspiracy and corruption is one of the factors responsible for bad debts.
Narrating his personal experience as a recovery officer with the bank, he said at a point last year he was able to recover part of the principal from a loan beneficiary, “who upon much pressure asked us to collect the balance from a senior staff with the bank, alleging that he collected it as gratification for working out the loan. The man said he could not pay for what did not get to his account. After probing the allegation, we discovered that it was true. To our consternation, that officer had already invested his share in a hotel in Lekki, which the bank seized before he was sacked. It is that bad. This kind of thing is going on in all the banks and if you investigate very well, you will discover that many of the banks are guilty of this. Or how can you explain a bad debt, when the collateral ought to be the last resort for loans recovery, ” he queried.

CBN spokesman, Mr. Isaac Okoroafor described non-performing loans as part of any business environment, adding that they should not be seen as a sign of weakness in the banking sector.

“Non-performing loans occur, when economic situation is not very good, especially now that oil price is plummeting. But we have it as a duty to ensure that the level will not threaten the existence of banks because of failing oil price,” he explained.

As for now, the level of non-performing loans does not yet appear as threat to the affected banks. They are still doing well, because they are operating under tighter control and stringent guidelines.


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