Rising Banks’ Non-Performing Loans Indicate Economic Health –Analysts

Lagos – Fiscal and monetary authorities’ efforts to boost private sector credit for economic growth yielded positive results as at end of third quarter 2018, according to the Central Bank of Nigeria (CBN) quarterly economic report for the period. However, the impact on banks’ assets quality was negative.

The National Bureau of Statistics (NBS) data on selected banking sector indices for Q3-18 showed that the industry was exposed to high credit risk as asset quality (depicted by the ratio of non-performing loans (NPL) to total loans) deteriorated from 12.5 percent in Q2-18 to 14.2 percent in Q3-18.

Additionally, the ratio of NPLs to total loans (after specific provisions had been deducted) significantly increased from 14.3 percent in Q2-18 to 16.8 percent in Q3-18. This compares unfavourably to the maximum prudential threshold of 5.0 percent.

Market analysts see a correlation between the rising NPLs and the general health of the economy which, according to them, have impacted business operating environment in the country and made loan repayment difficult.

Specifically, analysts at United Capital Research said the rising NPLs of banks is as a result of their growing exposure to the riskier real sector, which has been impacted by election uncertainties and the pressure on the naira, amid a fresh slump in oil prices.

“Overall, our view remains that despite efforts by authorities to boost private sector credit, a lot still needs to be done to improve the business operating environment in the country, in a bid to create more creditworthy borrowers,” the analysts said.

The Executive Director and Chief Operating Officer of FundQuest Financial Services Limited, Bisi Oni, told Daily Independent that there was a correlation between gross domestic growth (GDP), macroeconomic variables and NPLs, and that a dip in GDP could affect businesses’ capacity to earn and meet their loan obligations.

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“There is an inverse correlation between GDP growth and the health of the economy, which currently is, at best, anaemic. In an environment where monetary policy is pro contraction, cost of accessing credit is high, and declining production as well as rising inflation could only throw up more loan defaults,” he noted.

He stressed that the general macro-economic environment had made repayment difficult, which was why NPLs worsen as credit to the private sector improves.

In his response, Cyril Ampka, an Abuja-based economists, said it was impossible to insulate the micro economy which banks belong from the macro economy.

His words: “It will be an exercise in futility if we think what is currently happening to the economy will not affect the banks. The banks are meant to be the livewire of the real sector but they are afraid of lending because they have not been able to recover the ones they have given out.”

However, over 2018, fiscal and monetary authorities have made efforts (ranging from a shift to the international debt market to the persuasion of DMBs via moral suasion to lend to the real sector players) aimed at boosting private sector credit to spur economic growth.

The impact of this was evident in Q3-18 as total credit to the private sector rose by 1.62 percent q/q to N15.6 trillion, having declined in the previous three quarters.

According to the CBN quarterly economic report, on quarter-on-quarter basis, banking system’s credit to the private sector grew by 1.2 percent to N22.470 trillion at end-August 2018, in contrast to the decline of 0.4 percent and 0.1 percent at the end of the preceding quarter and the corresponding period of 2017, respectively.

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The CBN said the development was due to the 1.7 percent and 0.7 percent increase in claims on the core private sector and claims on state and local governments, respectively.

Over the level at end-December 2017, banking system’s credit to the private sector grew by 0.8 percent, in contrast to the decline of 0.04 percent at end of the second quarter of 2018. The development was due to the rise in claims on the core private sector and claims on state and local governments, respectively.



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