Banks Non-Performing Loans Ratio Moderates as CBN Debits Rise
Nigerian banks rise above shocks faced in the economy, from the outbreak of the pandemic and regulatory driven following incessant debits by the apex bank for failing to meet the 65% loan to deposits target, as non-performing loan moderate.
In a document released on its website ahead of a rescheduled policy meeting next week, the Central Bank of Nigeria recognised that though banks posted improve credits to the real sector, the proportion of bad loans to gross loans sloped downward.
Low banking sector non-performing loans ratio keeps Nigeria’s banking sector financial soundness robust, according to statements by members of the monetary policy committee of the Central Bank.
Monetary policymakers noted that the industry’s capital adequacy and liquidity ratios were noted to remain robust at 15.5 and 41.3 per cent, respectively, in June 2021.
In a statement obtained from CBN’s communique, the apex bank deputy director, Ahmad Aishah told the meeting that the banking sector remains resilient with strong fundamentals.
Ahmad recognised that the banking industry continued to post strong growth with total assets increasing by N5.82 trillion or 12.17 per cent between June 2020 and June 2021.
“Financial soundness indicators were also robust and significantly met minimum regulatory requirements – Non-Performing Loans (NPLs) ratio declined further to 5.7 per cent in June 2021, 10 bps lower than the rate recorded in the previous month”
Similarly, the industry’s capital adequacy and liquidity ratios were noted to remain robust at 15.5 and 41.3 per cent, respectively, in June 2021.
Read Also: Pressure Eased on Interbank Rates Day after CRR Debits
According to the note, Ahmad explained that increased credit to growth-enhancing sectors of the economy such as agriculture, manufacturing and general commerce helped support output recovery recorded in the domestic economy.
Total credit increased by N3.14 trillion from N18.90 trillion to N22.04 trillion between end-June 2020 and end-July 2021 due largely to an increase in the level of funding and the CBN’s Loans to Deposit Ratio policy.
Whilst noting the satisfactory performance of the financial system, she said the CBN must remain vigilant and proactively manage operational, asset quality and other risks to financial system stability, especially with the lingering impact of the COVID-19 pandemic.
“The Bank is also advised to increasingly consider Environmental, Social and Governance risk factors and ensure their integration into its policy tool kit given recent unprecedented extreme weather conditions and frequent natural disasters being witnessed across the globe.”
External sector developments also mirrored the gradual recovery in economic activities over the first two quarters of 2021.
Nigeria sees increased flow from foreign portfolio investments (FPIs) which jumped by US$0.21 billion, from US$0.16 billion in May 2021 to US$0.37 billion in June 2021 signifying increasing confidence in the Nigerian economy, according to CBN deputy chief.
It was also noted that diaspora remittances increased to US$4.29 billion in Q1, 2021 from US$ 4.09 billion in Q4, 2020 because of CBN’s exchange rate management policy measures.
At the time, external reserves increased marginally to US$33.70 billion as of July 14, 2021, from $32.78 billion at the end of June 2021 partly reflecting positive developments in the international crude oil market whilst relative stability was also maintained in the Investors and Exporters segment of the foreign exchange market between June and July 2021.
“With the Committee’s decision to discontinue weekly FX sales to Bureau de Change operators, more stability and transparency is expected in the FX market”.
System liquidity remained ample even though aggregate domestic credit grew by only 4.30 per cent in June 2021 compared with 4.79 per cent in May 2021, said Asogwa Chikwendu, a member of MPC.
Asogwa said while credit to the central government declined during this period, the credit to the private sector grew, noted that the progress is largely attributed to the sustenance of the CBN’s credit enhancing policies.
Supporting Ahmad, Asogwa said in the statement that the banking sector itself remains stable and resilient, with strong liquidity and capital adequacy ratios.
The ratio of gross nonperforming loans (NPLs) to total loans further declined from 5.8 per cent in May to 5.7 per cent in June 2021. Interestingly, repayments and recoveries were noted in key sectors including, oil and gas, manufacturing, construction and agriculture.
Also, Obiora Kingsley added that the banking sector Capital Adequacy Ratio and the Liquidity Ratio both stood at 15.5 and 41.3 per cent in June 2021, above their prudential benchmarks of 15.0 and 30.0 per cent, respectively.
Consequently, the gross banking sector credit increased by N1.55 trillion from N22.68 trillion at the end of December 2020 to N24.23 trillion at the end of March 2021. Added that the increased credit was recorded in manufacturing, consumer credit, general commerce, information and communication and agriculture.
“This improved performance was driven by the policy of loan-to-deposit ratio (LDR), the extension of regulatory forbearance and other macro-prudential measures.
“Although the Non-Performing Loans (NPLs) was above the regulatory benchmark of 5.0 per cent, it improved from 6.41 per cent in June 2020 to 5.70 per cent in June 2021, reflecting strengthening risk management practices, Global Standing Instruction (GSI) policy, and case-by-case review of regulatory forbearance”.
It was noted that average monthly weighted average Inter-bank Call and Open Buy Back (OBB) rates rose to 16.87 and 16.39 per cent in June 2021 from 15.95 and 16.18 per cent in May 2021, showing tight banking system liquidity conditions.
Though between July and September, average interbank rates have slowed down significantly, currently at single-digit as the financial system remains robust in terms of liquidity.
Obiora has preached to the committee that the reduction in the liquidity conditions is part of the effort to ensure a stable banking system and rein in the monetary side of inflation pressures.
In coming to terms with the sustained status quo, Godwin Emefiele in his speech noted that policy tightening will limit excess liquidity available to attack the foreign exchange market, it nevertheless feels that tightening will reduce the money supply.
Thus, inhibits the ability of Deposit Money Banks (DMBs) to create credit that is needed to stimulate manufacturing output which could also help to moderate prices.
On loosening, the policy committee said this should transmit into lower market interest rates which could improve the ability of obligors to repay their loans and reduce NPLs.
Nevertheless, the committee feels loosening would not only exacerbate inflationary pressure, but this would increase the negative real rate of return and discourage investments in the domestic economy.
Banks Non-Performing Loans Ratio Moderates as CBN Debits Rise
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