•CBN’s defence of the sector is good, but eternal vigilance is better
EXPECTEDLY, the Central Bank of Nigeria (CBN) rose in stout denial of the claim by the Dubai-based Arqaam Capital, published by Bloomberg, that some Nigerian banks were experiencing “full-blown financial crisis” arising from “failed fiscal and monetary policies”. The report, credited to two analysts from the brokerage and investment bank, had noted that two lenders were close to being insolvent while two would need a dilutive capital hike.
“Capital ratios”, they observed, “were set to worsen because of currency depreciation and soaring loans”; they identified the devaluation of the naira and rising bad loans among the factors that the banks are currently grappling with. The test conducted by the analysts is said to have revealed seven under-capitalised banks with a deficit of $3.2 billion. Not all, “a stress test identified one of the tier-1 banks as the most under-capitalised lender while others were showing deficits if they were to fully provide for non-performing loans”.
Dismissing the report last week, CBN’s Director of Banking Supervision, Tokunbo Martins, insisted that Nigerian banks have very strong capital buffers to weather the country’s economic crisis. Her words: “I can tell you that the report is false. The banks are adequately capitalised, so the report is not true. That does not mean that the banking sector is not feeling the economic headwinds. The headwinds are also in every other jurisdiction. It is not strange. So, non-performing loans at 11.7 per cent is not what we should focus on”.
Much as we understand the responsibility of the apex bank, as the guarantor of financial system stability, to seek to calm the nerves of the operators, particularly at a time like this, we would advise that eternal vigilance be its watchword. For, contrary to the picture of calm being sold by the apex bank, a number of the findings in its latest Financial System Stability Reportwould appear to attest to the validity of the report, hence the need for tough, proactive measures.
Top among this is the dramatic rise in Non-Performing Loans (NPLs) from N649.63 billion, representing 5.9 per cent at end-December 2015 to N1.679 trillion or 30.9 per cent by the end of June – a leap of some 158 per cent. Second is the increasing vulnerability of the medium and small banks. As against the finding that large banks which the report found to be “resilient to credit risk and would be able to sustain an impact of the most severe shock of a 200 per cent rise in NPLs”, the report would equally note that “medium and small bank groups, showed vulnerability to the most severe shock of 200 per cent rise in NPLs”.
The third is the decline in asset quality – measured in terms of the ratio of non-performing loans to gross loans – said to have “weakened in the first half of 2016, deteriorating by 6.4 percentage points to 11.7 per cent at end-June”.
None, however, could be as troubling as the finding that some 50 customers owe 33.4 per cent of commercial banks’ entire private sector credit. Says the report: “The total exposure to the top 50 obligors stood at N5.23tn (33.4 per cent) of total industry credit exposure of N15.68tn. In a country said to have some 21 million bank customers, the development not only exposes the farce about the oft-touted claims about financial inclusion, that bank credits in particular, have remained the preserve of the well-connected, a segment that has proven time and time again to be delinquent borrowers. This would obviously explain why the financial system has remained fragile.
Taken together, the reports are meant to be a wake-up call for tough regulatory actions, not just to avert a looming systemic crisis but to ensure a deepening of the industry.