IMF Warns Banks Against Huge Non Performing Loans

The International Monetary Fund has warned that African banks’ portfolios may suffer a huge shock.

The Non-Performing Loan of Nigerian banks fell to 5.89 per cent in April from 6.6 per cent in April 2020.

Non-Performing Loan is a loan that has been subjected to late repayment or may not be fully repaid by the borrower.

The COVID-19 pandemic had triggered central banks to compel banks to increase their credit to customers.

With the pandemic, consumer spending became very low to trigger economic activities amidst recession in most African countries.

In Nigeria, gross banking sector credit at end-March 2021 stood at N23.53trn compared with N22.68trn at end-December 2020, according to the Central Bank of Nigeria.

But the IMF in a report released on Tuesday said as soon as exceptional relief measures are gradually withdrawn, it will become possible to assess the full impact of the crisis on banks’ portfolios.

IMF said, “If history repeats itself, the crisis experienced by SSA countries should lead to a large deterioration of loan portfolios, once regulatory forbearance and other exceptional support measures expire…

“The quality of banks’ portfolios is bound to deteriorate during the crisis because many borrowers have faced a collapse in their income.

The IMF lamented that customers may be unable to repay their loan obligations due to factors, including government arrears creating debt repayment difficulties for
domestic suppliers, poor credit risk management practices, and a legacy of problem loans that remain unresolved.

Nigeria’s apex bank said banks NPLs were at 5.89 per cent in April 2021, an improvement compared with 6.6 per cent in April 2020.

Banks’ Capital Adequacy Ratio and the Liquidity Ratio both were above their prudential limits at 15.8 and 38.9 per cent, in April respectively.

“The COVID-19 crisis is likely to aggravate the NPL problem even further,” said the Washington based lender, adding “In the short term, banks should prioritize dealing with their customers’ diminished capacity to repay.” 

The lender advised that once countries have implemented comprehensive resolution strategies, they should shift their focus toward preventing a re-accumulation of new arrears, which could undo past efforts.