NPLs ratio is still higher than the prudential limit of 5% – CBN

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Stories by Kayode Tokede

Members of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) have raised concern over Banks Non-Performing Loans ratio that is still higher than the prudential limit of five per cent.

The members in their personal statement at the last meeting

A personal statement by Deputy Governor, Corporate Services, CBN, Mr. Edward Adamu noted that other vulnerabilities in the banking sector include high concentration and contagion risks as well as significant foreign exchange exposure.

According to his personal statement, “In the banking system, major financial soundness indicators (FSIs) further improved in April 2019 due mainly to recoveries, loan disposals and write-offs.

“Industry Capital Adequacy Ratio (CAR) increased marginally to 15.60 per cent in April 2019 from 15.14 per cent in February 2019, while NPLs decreased to 10.95 per cent from 11.28 per cent.

“However, the NPLs ratio is still higher than the prudential limit of five per cent. Other vulnerabilities

in the industry include high concentration and contagion risks as well as significant FX exposure.

“These conditions have tended to increase averseness to risk in the industry leading to some form of asset substitution. It is especially concerning that credit to the private sector is declining and this needs to be halted and possibly reversed to strengthen economic activity and job creation.

The Deputy Governor, Economic Policy, CBN, Okwu Nnanna in his statement,  said banks NPL ratio is still high and above the  prudential limit, disclosing that though the return on equity and return on asset showed decline between February and April, 2019, still high compared to comparator countries where efficiency and management levels are much higher.

In his words, “The assets of the banking industry have continued to trend upwards driven by increased investment in government securities.

This leads us to the issue of concern in the industry’s asset structure. The proportion of government securities in the banking industry’s asset structure is growing while that of loans and advances is declining; loans and advances are being displaced by banks’ investment in government securities which have become seductive to them because of their high yields and risk-free nature.

“This cannot be allowed to continue as it implies abandonment of their primary mandate of intermediation to the detriment of production, distribution and exchange that are yearning for loans financing. Even though the number of new credits increased strongly in April, 2019 compared to December, 2018, the value of such credits is much lower while the credit is highly concentrated in a few obligors. Therefore, a way must be found to limit banks’ purchase of government securities so that they can focus on their primary functions of deposit mobilization and lending. At the same time, the Central Bank would need to expedite the implementation of its planned measures aimed at assisting the banks to minimize non-performing loans and boosting loans repayments. This will further encourage the banks to focus on delivering on their primary mandate of intermediation and hence avoid crowding out the non-bank public in the government securities market.

In addition,  Dahiru  Balami, another member of the MPC said, “On the non-NPLs ratio, there was improvement as the ratio declined from 11.28 percent in February 2019 to 10.95 percent in April 2019.

“The reduction in the NPLs was driven by write offs and recoveries. There was

also increase in provisioning by banks for NPLs in the review period.

“Similarly, the industry liquidity ratio (LR) rose further from 51.05 percent in February, 2019 to 52.61 percent in April 2019. This performance was 4.81 percentage points higher when compared with of the ratio at end-April 2018. Overall, the Nigerian banking sector remains sound and resilient.”

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