The Central Bank of Nigeria has decried the increase in bad loans as the banking industry continue to struggle in the economic downturn.
Bad loans have soared to more than double the limit set by the regulator. According to a report on Central Bank of Nigeria’s website, the ratio of these loans to total credit rose to 11.7% at the end of June from 5.3 percent at the end of 2015. This has gone way above 5 percent which the apex bank requires for the industry.
“Credit risk is expected to trend higher into the second half of 2016 owing to increased loan impairments resulting from the depreciation of the naira,” the bank said, adding that the inability of debtors to service foreign currency-denominated loans and bank exposures to the oil and gas sector were also factors.
The effect of foreign exchange shortages
Nigerian Banks are battling severe shortages of foreign exchange, which an almost 40% devaluation of the naira against the dollar in June has failed to rectify. Gross domestic product is set to shrink 1.7% this year, according to the International Monetary Fund, which would be the first full-year recession since 1991.
Nigeria’s biggest lender by assets, First Bank, has been one of the worst hit. Its non-performing loan ratio increased to 23% at the end of June from 4.1% a year earlier.
Capital levels have also decreased. The sector’s capital adequacy ratio fell to 14.7 percent in June from 16.1 percent in December. For big banks, which the regulator classifies as having more 1 trillion naira ($3.2 billion) of assets, that fell to 15.65%, still above the requirement of 15%.
The CBN Governor, Godwin Emefiele however revealed that the system remains stable and resilient in spite of prevailing macroeconomic challenges.