As the International Monetary Fund (IMF) raised questions over the rising non-performing loans (NPLs) in the Nigerian banking industry, the Financial Stability Report (FSR) from the Central Bank of Nigeria (CBN) for the first half of 2017 has shown that average non-performing loans in the industry has risen from 12 per cent to 15 per cent.
The IMF in its report on Nigeria on Wednesday had noted the level of NPLs in the banking sector has risen to 15.5 per cent as at October 2017 with solvency ratios declining form 14.8 per cent to 10.5 per cent between December 2016 and October 2017, “reflecting difficulties in four small and medium-sized undercapitalised banks including one insolvent bank.”
IMF noted that some of these banks are kept afloat through continuous recourse to the CBN’s lending facilities as NPLs have increased from five percent of total loans in June 2015 to 15.6 percent in October 2017. The Financial Stability Report for the first half of 2017 ended June released by the CBN yesterday showed that the asset quality of commercial banks declined in the first half of 2017 with the ratio of NPLs to gross loans increasing by 2.2 and 4.3 percentage points to 15.0 per cent at end-June 2017 compared with the levels at end-December 2016 and end-June 2016, respectively.
Also, the ratio of non-performing loans net of provision to capital for the industry increased to 31.8 per cent at end-June 2017 from 29.0 per cent at end-December 2016. The FSR also showed a declining Capital Adequacy Ratio in the banking industry.
The average baseline capital adequacy ratios (CARs) for the banking industry stood at 11.51 per cnet in the review period with the average for large, medium and small banks as at end of June 2017 stood at 13.13, -6.71 and 13.54 per cent, respectively. These represented a decline of 3.27, 2.34 and 19.46 percentage points for the industry, large and medium banks, respectively from the position at end-December 2016.
However, the small banks group grew by 10.40 percentage points from 3.14 to 13.54 per cent
The CBN said the decline in CARs was attributable to the challenges in the oil and gas sector coupled with the slow recovery in the domestic economy which resulted to a rise in NPLs and capital deterioration. A stress test showed that only large banks could withstand a further deterioration of their NPLs by up to 50 per cent. However, none of the groups withstood the impact of the most severe shock of a 200 per cent increase in NPLs as their post-shock CARs fell below the 10 per cent minimum prudential requirement.
The impact of the severe shocks on the banking industry, large, medium and small banks will result in significant solvency shortfall of 15.21, 9.78, 93.42 and 17.53 percentage points from the regulatory minimum of 10 per cent CAR, amounting to N2.77 trillion, N1.54 trillion, N0.98 trillion and N0.25 trillion, respectively.