By Kayode Tokede
The Central Bank of Nigeria has said Non-Performing Loans (NPL) ratio of banks jumped to 6.3per cent for the month of February 2020.
The NPL ratio measures the rate of bank loans that are either going bad because they are not being serviced adequately or have gone bad completely.
The Governor of CBN, Mr. Godwin Emefiele in his communiqué stated that “The MPC noted the performance of the Financial Soundness Indicators (FSIs) of the DMBs which showed a Capital Adequacy Ratio (CAR) of 15.2 per cent, NPL ratio of 6.3 per cent and Liquidity Ratio (LR) of 40.5 per cent, as at February 2020.
“On NPLs, the MPC noted that the ratio remained above the prudential benchmark of five per cent and urged the Bank to sustain its regulatory measures to bring it below the prudential benchmark.”
The apex bank regulatory acceptable NPL ratio is five per cent, however, this ratio has been breached since the fall in oil prices began in the 4th quarter of 2019 and the COVID-19 pandemic broke in 2020.
In the CBN’s 2020 4th quarter economic report, the NPL ratio for the month of December stood at 6.1per cent up from 6.06per cent in December 2019. Despite the rise in NPL, the apex bank still believes Nigerian banks are healthy.
“The health of banks was generally sound, although the quality of their assets, measured by the ratio of NPLs to industry total outstanding loans, stood at 6.1 per cent at end-December 2020, compared with 6.06 per cent at end-December 2019 and above the five per cent prudential requirement.”
The NPL ratio is one of the most important benchmarks for measuring the health of the banking sector. At above six per cent, it indicates most commercial banks are carrying more underperforming loans than expected mostly because the private sector is not servicing the loans.
Some of the loans may be worse than reported going by past reports, where what was reported by some banks were understated.
Most of the major oil majors are reportedly falling behind on servicing loans due to the COVID-19 pandemic and fall in oil prices.
The CBN has also given banks a lifeline, allowing them to defer loan repayments that have fallen due by either restructuring the loans or refinancing them.
This helps banks avoid the need to make provisions for the loans which would have inadvertently increased their NPL ratio.