Credit bureaus and bank’s bad debtors (1)

WE are at an unusual time in the Nigerian lending landscape. On April 22, 2015, the Central Bank of Nigeria (CBN) issued a letter to all Nigerian deposit banks and discount houses directing them to give all bad debtors in their loan books 90 days to turn their accounts status from non-performing to performing. At the expiration of the three months’ notice, banks should publish the names of those outstanding in three national dailies. This should be done on a quarterly basis. In addition, the CBN itself would blacklist such bank customers and ban them from participating in the foreign exchange and government securities markets.

The Central Bank’s hard stance and directive to banks to embark on this unorthodox method stemmed from the realisation of rising trend of non-performing loans in the banking industry. The CBN has set a prudential limit of five per cent of non-performing loans and it feared that if nothing is done, it is just a matter of time before this threshold is reached and exceeded.

This is not a misplaced anxiety on the part of the Central Bank. Nigeria has performed fairly well in managing the incidence of bad debts, after the creation of the Asset Management Corporation of Nigeria (AMCON). The country’s average level of Non-Performing Loans (NPLs) ratio reduced from 33 per cent in 2009 to just over three per cent in 2013. However, by the end of 2014, the figure has moved to 4.5 per cent.

Nigeria has had its share of troubles in the lending industry. For the period spanning 2000 to 2005, before the consolidation exercise in the banking industry, the level of NPL was above 20 per cent, on the average. This came down sharply to about eight per cent in 2006 and 2007 and indeed, about six per cent in 2008. In 2009, the NPL hit the roof at 33 per cent, necessitating the establishment of AMCON and licensing of three private credit bureaus. AMCON was to take over the toxic assets in the industry under various terms and conditions while the private credit bureaus were to assist in mitigating the challenge of information asymmetry and lending in the dark and promote informed lending, robust risk management process and risk-based pricing. Credit bureaus are to support banks’ move towards using obligor and facility risk rating models in line with leading practices and Basel 2 and 3 requirements.

Some analysts are of the view that the reduction in NPLs we have witnessed emanated more from loan book write-offs. For me, the establishment of AMCON and private credit bureaus made us to experience the lowest rate of NPL in two decades. NPL dropped significantly to 14 per cent in 2010, five per cent in 2011, 3.5 per cent in 2012 and 3.2 per cent in 2013. It is important to note that apart from continuous decline in the level of NPLs, the total volume and value of loans to consumers, SMEs and agriculture gradually began to improve and increase. And this also underscores the importance of the huge position of the level of NPLs. In 2000, total loans by the banking sector were just slightly above N500 billion. By 2014, the total loans in the sector were over N12 trillion. An NPL rate of 4.5 per cent in 2014 implied that, at least, N533 billion value of loans is lost.

Genuine concerns have been expressed by the informed public on this. In the first instance, there was the challenge of legality and morality of an industry position or a regulator-directed action to publish the names of defaulters with a mission to ‘name and shame.’ While this may provoke some interest and debate in the public space, some are of the view that it is illegal to unilaterally break the confidentiality of information a banker traditionally owes his customers, which should be broken only under special circumstances, especially when compelled to do so by a court of law or by the industry regulators.

Nigeria is not the first country to embark on ‘name and shame’ to pressure bank loan defaulters to pay up. India embarked on this and went to the extent of publishing pictures and pasting of defaulters’ information in the bank premises all over the country. Some customers went to court but there was no unanimity among courts as divergent judgements were delivered. Switzerland also published the names of defaulters on its student loan programme. The legality or otherwise of this ‘name and shame’ action can only be determined by courts of competent jurisdictions.

Nonetheless, resort to this unorthodox method of bad debts collection has its own merits. Some customers in this bracket would have paid up or negotiate their loans for payment or restructuring during the three months’ notice granted to them. This may have allowed them save themselves from the embarrassment of the publication. Consequently, the action enhances collection by banks. Some others would approach the lenders for discussion to negotiate repayments, which would also spur repayments. Furthermore, the Central Bank which directed this line of action has a responsibility to prevent systemic failure by taking steps to address the escalation of non-performing loans beyond the prudential threshold, threatening the stability of the financial system.

Furthermore, banks need to save themselves from capital erosion. And so, there is no action taken that is within the law that would be too grave to save the financial system, including publishing the names of defaulters in newspapers. Since some of the customers have gone to court, it will be interesting to wait for the pronouncements of the courts on this issue.

The most important puzzle confronted by some observers is that despite the credit bureaus working efficiently, the incidence of NPLs is still rampant and growing. The main factors responsible for this thinking are manifested in the expected services to be rendered by credit bureaus to lenders. Credit bureaus furnish lenders with the tools and products that help to mitigate information asymmetry, promote information sharing among lenders, enhance informed lending, reduce lending in the dark, enhance risk-based pricing and ward-off access to credit for defaulters, fraudsters and serial borrowers.

Credit bureaus provide information that enable lenders have information on borrowers’ credit history, exposures to multiple creditors, performance status of the facilities, etc. It becomes easy to then identify serial defaulters, a borrowers’ total exposure and their performance. When the credit bureau infrastructure works, it is expected that the level of NPLs would reduce. In addition, access to credit for consumers and SMEs grow significantly and the ease of obtaining credits by these segments of the economy who have positive data improves.

•To be continued tomorrow.
•Popoola is a Credit Bureau Consultant.