Banks, bad loans and miscellaneous matters

Almost entirely fortuitously, Nigeria’s economic outlook is gradually brightening beyond projections, as the price of crude oil, the country’s economic mainstay, keeps soaring, hitting ‘unimaginable’ heights in a matter of months. It is news that Brent crude price which stood at an average of US$44 per barrel in 2016, rose to US$65pb in 2017, is today hitting almost US$80 per barrel. Historically, Brent crude oil reached an all-time high of US$145.61per barrel almost 10 years ago in July of 2008. The current and persisting oil price scenario is attributable to a number of factors, especially curtailments in production by members of the Organisation of the Petroleum Exporting Countries (OPEC) and robust global demand. The OPEC agreement to curtail crude oil production in 2017 and subsequent extension of that agreement through 2018, no doubt, tightened crude oil supplies, which put upward pressure on crude oil prices.

Ironically, however, while the Nigerian economy is essentially benefitting from the ‘oil price windfall’, the lubricator or catalyst of the system, the banking industry, remains heavily burdened with huge bad or non-performing loans (NPLs), running into trillions of naira. The International Monetary Fund (IMF) in its report on Nigeria in March 2018 had noted that the level of NPLs in the banking sector had risen to 15.5 per cent as at October 2017 with solvency ratios declining from 14.8 per cent to 10.5 per cent between December 2016 and October 2017, “reflecting difficulties in four small and medium-sized undercapitalised banks including one insolvent bank.” IMF said that some of these banks are kept afloat through continuous recourse to the Central Bank Nigeria’s lending facilities as NPLs have increased from five per cent of total loans in June 2015 to 15.6 per cent in October 2017.

And certainly curiously, the biggest chunk of the bad loans are attributable to the banks’ exposures to the oil and gas sector—the mainstay. In other words, much of the credit facilities given by banks to operators in the various tiers and streams of the oil and gas sector in recent times, have gone bad. Headlines and reports in the media (print, electronic and online) showing the magnitude of the bad loans is worrisome; and that is, putting it euphemistically. Some of the recent headlines include: ‘Three banks hold 60% of N700 billion insider bad loans, says NDIC’; ‘14 banks incur N368.3 billion bad loans in 9 months’; ‘NDIC worried as NPLs in Banks grows by 50% to N2.4 trillion,’ among others.

But it is quite apposite to wonder why there exist the huge non-performing loans (NPLs), and why the bulk of the bad credit is traceable to the oil and gas sector, especially as the price of oil is soaring. Ordinarily, risks inherent in banking dictate that at every point in time, a bank must have outstanding facilities—loans and advances, etc. Universally, the state of the economy in which the beneficiary entity (the borrowing company) operates, all things being equal, affects or determines its ability to repay or not, its credit facilities.

By this very fact, it could be argued that the huge NPLs in Nigerian banks are a product of the recessionary economy which persisted up to mid-2017. And in particular, the sharp drop in the price of crude oil from over US$100 per barrel in 2014 to below US$45 per barrel in 2016, which messed up all projections and business calculations in the critical oil and gas sector. Consequently, terms and conditions of virtually all credit facilities could no longer be kept or honoured by most borrowers. Indeed, the Nigerian economy is yet to fully come out of the woods; not when the Gross Domestic Product (GDP) growth that hit 2.11 per cent in the last quarter 2017, had declined to 1.95 per cent in the first quarter 2018, according to data from the National Bureau of Statistics (NBS). Nor will the economy sustain a recovery trajectory when, seven months after the 2018 Federal Budget was presented to the National Assembly for consideration, it is yet to be passed into law.

Plausible as the foregoing line of thought appears, a critical consideration of the basics, namely the observance or otherwise of ‘Canons of Lending,’ could show more convincing reasons for the humongous NPLs in the books of banks. These Canons of Lending will normally ensure consideration for the purpose (of the credit), the amount, repayment modality, tenor and security. But do banks really strictly observe these canons as they assess or appraise credit requests and proposals from prospective borrowers, especially operators in the oil and gas sector? Or, are the credit analysts/appraisers in the banks blinded by the lure to join in licking from the “honey pot” that the oil sector is (perhaps erroneously) perceived to be? Unfortunately, Nigeria’s almost total dependence on oil money for several decades has imbued banks (and indeed, almost every Nigerian) with the mind-set that non-participation in oil business means ‘no business.’ This mind-set has been largely responsible for the mere singsong that diversification of the Nigerian economy has remained over the years.

In addition to the canons of lending, do the banks strictly apply what is popularly called the “Cs” for credit assessment? These are Capital (the stake of the borrower in his business), Capacity (technical and legal capacity to carry on with the business), Character (character and track record of the borrower), Collateral (almost the same thing as security) and Consideration (ensuring that interest charged keeps the lender profitable). Sacrosanct as the “Cs” rules would seem in bank lending, the reality is that many credit analysts/banks succumb to a motley of pressures to underplay or side-track some of the Cs. Some selfish or other hidden motives often becloud professionalism and/or observance of the time-honoured ethics of banking. Indeed, corporate governance is thrown to the dogs.

The upshot of this is the huge and rising NPLs in the banking industry. Thus, under one of the headlines earlier referred to, the Chief Executive of Nigeria Deposit Insurance Corporation (NDIC), Umaru Ibrahim, said three commercial banks had been identified to have in their balance sheets, 60 per cent of the N700 billion insider-related bad loans bedevilling the industry. Ibrahim who spoke at a recent forum organised by the Financial Institutions Training Centre (FITC), Lagos, said the level of non-performing loans (NPLs) in the industry could be lower if the banks were to adhere more to sound corporate governance. According to the NDIC boss, a large part of the NPLs came from loans to oil and gas sector, regretting that many of the banks’ lending to key sectors of the economy reflect lack of industry knowledge needed to properly assess the loans. “The bad loans we see today in banks are mainly due to large exposure to oil and gas sector. They expose themselves to the sector without the right industry knowledge. The banks go with the bandwagon effect, as once there is loan syndication, every lender will want to be part of it without understanding what is involved,” he said.

At the same FITC forum, a scholar and immediate past President, Chartered Institute of Bankers of Nigeria (CIBN), Professor Segun Ajibola, sounded a warning note and called for quality regulation and examination of banks to detect and deal with poor corporate governance issues on time. “It is lack of corporate governance that will allow credit to go out without due approval. We need to tackle this challenge at the regulatory and operators levels to achieve the desired result,” he said.

On the whole, if only ‘insider-related’ bad loans, as revealed by the NDIC boss amounts to a whopping N700 billion, then, the entire NPLs in the books of banks must be a stupefying figure running into trillions of naira. Certainly this horrible state of affairs would have been avoided, if good corporate governance tenets and sustainable banking principles were adhered to by parties in the credit processes in the banks. After all, corporate governance essentially involves balancing the interests of a company’s many stakeholders while sustainability tenets ensure decent pursuit of the ‘triple bottom line’ (of Profit, People and Planet), that is financial, social and environmental footprints. It is therefore safe to say that the huge NPLs in the books of banks are not entirely a reflection of the state of the Nigerian economy. Indeed, it is inescapable to conclude that greed, unprofessionalism, poor ethics and other selfish interests of managements of banks and their credit processing officers are, in the main, to blame for the burgeoning bad loans of banks.

Okeke, a practising economist and sustainability expert lives in Lagos.