Experts want monitoring of debtors over rising NPL

The rise in the bank’s Non-Performing Loan (NPL) ratio due to huge exposure to some sectors, has become a source of worry to financial experts, as they urge financial institutions to a adopt proactive risk management measures.

For them, a system whereby the behavior of the borrower is monitored closely to ascertain changes that are likely to trigger default would be necessary.

The experts argued that due to the pressures of the recession on corporate cash flows for debt service, particularly the impact of the foreign exchange rate crisis, there seems to be an increasing level of corporate loan default.

Indeed, after a peak of 37.3 per cent in 2009, various regulatory interventions brought it down to 20.1 per cent, 5.8 per cent, 3.7 per cent, 3.4 per cent and then 3.0 per cent in 2010, 2011, 2012, 2013 and 2014 respectively.

It is worthy of note that In spite of these intervention measures, the non-performing loan ratio has steadily climbed back up in recent times.

For instance, a recently released banking industry report by Agusto & Co showed that about 10.9 per cent of the loan book in the banking industry, representing ₦1.5trillion are in Stage 3 (impaired), as at December 2018.

The figure represents 15 per cent increase in non-performing loans (NPLs), when compared to the N1.3 trillion posted in the industry in 2017.

Debts in Stage 3 are loans with objective evidence of impairment at the reporting date. In the previous period, Stage 3 loans can be assumed to be ‘individually impaired or non-performing loans (NPLs). They also comprise credit-impaired loans, including all loans that are 90 days overdue.

Specifically, in 2017 non-performing loans was ₦1.3trillion, this accounted for 9.5 per cent of the loan book. The 15 per cent increase in Stage 3 loans in 2018 compared to 2017 is evidence of the deterioration of the loan assets recognised by Nigerian banks.

Non-performing loans in the banking sector rose to N2.245 trillion in the third quarter of 2018 from N1.939 trillion in the second quarter, according to data from the National Bureau of Statistics.

The NBS data also showed that the NPL ratio – a key metric for banks’ health – rose to 14.16 per cent in the third quarter from 12.45 per cent in the previous quarter, compared to a regulatory limit of five per cent.

The Chief Executive Officer of Credit Registry, Jameelah Sharrieff –Ayedun, said being proactive in monitoring loans, in general, would reduce the likelihood of NPL happening in financial institutions portfolio.

“The point you make a decision to give out that loan, things happen afterwards, their decision of the borrower can change and if you do not monitor what happened afterwards, there can be a risk.

Sharrieff –Ayedun, on the sidelines of the Credit Bureau Association of Nigeria (CBAN) closing gong ceremony, told The Guardian that “at a point you made that decision to lend, you continue to monitor the behavior of the institution or the individual you have given that money to.

“With this, if things change you would be able to address it much more proactively instead of waiting until something happened.

“For instance, that personal income may have increased, that is an opportunity to do more with them. That person may have some difficulties, so it is better to have some discussions sooner than later so that that person can figure a way to restructure the loan.

“Being proactive in monitoring loans in general would reduce then the likelihood of NPL happening in our portfolio as financial institutions.”

The Chief Research Officer of Investdata Consulting Limited, Ambrose Omodion, said loan repayments should be monitored and whenever a customer defaults action should be taken.

“Banks should avoid loans to risky customers. They should monitor loan repayments and renegotiate loans when customers get into difficulties. Micro finance banks need a monitoring system that highlights repayment problems clearly and quickly so that loan officers of banks and their supervisors can focus on delinquency before it gets out of hand.”

Furthermore, he said the proper and adequate assessment is key to controlling or minimising default, describing the evaluation stage as the basic stage in the lending process.

“The appraisal stage includes diagnosing the business as well as the borrower. Before beginning the process of collecting information on the client for the purpose of determining credit limits, banks should visit the home or the work place of the client with the main objective of determining whether the client needs the loan programmes or not,” he said.

He added that such information would help the loan officer to assess the ability to effectively utilise the loan.

The Head of Research, FSL Securities Limited, Victor Chiazor, said for banks to reduce the NPL ration, they need a team of well-trained personnel who will do proper due diligence and credit analysis on the ability of the borrower to payback via the business the loan is being used for or any other means.

He noted that proper loan monitoring will also be done while any business expected to be used to fund the repayment of the loan needs to be properly understood for effective monitoring and forecasting.

According to him, diversifying the loan portfolio would also aid in reducing shocks that may arise from policy adjustments which may be harmful to a particular sector and may affect the business or customers’ ability to repay such loans.

“For banks to reduce their level of NPL’s, the banks will have to do things differently. The days of collecting an asset as collateral and going to sleep will have to end. If all these can be sustained, supported by CBN’s policy, giving banks the power to access a borrowers account nation wide in the case of a default, the banks should be able to keep NPL at a minimal level,” he said.