Crisis looms in banks over energy sector’s rising bad loans

THE Central Bank of Nigeria, CBN, has warned that the rising Non-Performing Loans, NPLs, in the oil and gas sector poses serious threat to stability in the Nigerian banking system. The CBN, in its Financial Stability Report for December 2015, released recently, disclosed that the collapse of crude oil prices and the  impact on government revenues and foreign reserves portend risks to banking system stability through increase in default rates, reduction in solvency levels and volatility in exchange rates. According to the CBN, non-performing loans, in the period under review, rose by 3.36 per cent to N649.63 billion at end-December 2015, from N628.54 billion at end-June 2015, representing a 78.8 per cent increase from the N363.31 billion recorded at end-December 2014. The NPL ratio, the CBN said, rose to 4.86 per cent from 4.65 per cent, adding that although the NPL ratio remained within the prudential ceiling of 5.0 per cent, it trended closer to the upper limit. The CBN disclosed that a few banks have non-performing loans’ ratio above the regulatory maximum limit of 5.0 per cent, noting, however, that this would not pose significant risks to the banking industry. According to the CBN, the Nigerian banking sector remains sound, maintaining capital levels well in excess of  minimum prudential requirements. Furthermore, the CBN  warned that the banking system’s credit risk was expected to increase due to threats of further rise in NPLs in the oil and gas sector. To guide against the envisaged crisis, the CBN said it increased the requirement for general provisioning on performing facilities from one per cent to two per cent with effect from November 11, 2015, while banks were also required to maintain capital buffers above their minimum prudential requirements.” Specifically, the CBN said, “In the reporting period, the Nigerian economy continued to witness a slowdown in growth as the persistent decline in the international price of oil led to the decline in government revenue. The decline also impacted the quality of bank assets owing to their exposure to the oil and gas sector. “To ensure that the banking system remained safe and sound, regulatory actions were taken so that systemically important institutions operated in a manner that would limit contagion. While capital adequacy requirements were increased to provide a buffer for banks in the prevailing unfavourable economic climate, they were required to develop their various recovery and resolution plans. “This would help ensure that in the event of a crisis, each bank would have in place an easy-to-implement recovery plan which would see it safely through the crisis.” The CBN report also noted that activities in the oil sector witnessed challenges arising from falling oil prices during the second half of 2015, despite average daily production of crude oil rising to 1.96 million barrels per day (mb/d) in the second half of 2015, from 1.92 mb/d in the first half. Despite the challenges witnessed in the oil and gas industry, the CBN revealed that the sector continued to attract the highest share of total credit as it accounted for 24.82 per cent of the total credit, compared with 23.78 per cent in the first half of 2015. Specifically, the report stated that the banking sector’s credit to the oil and gas sector stood at N3.307 trillion as at the end of December 2015, rising by 2.88 per cent from N3.215 trillion as the end of June 2015. Generally, the CBN stated that relative to the first half of 2015, the amount of credit extended to the various sectors by banks during the review period showed a downward trend, adding that total credit to the various sectors of the economy fell by 1.44 per cent to N13.329 trillion in the second half of 2015, as against the increase of 7.07 and 16.62 per cent in the first half of 2015 and the second half of 2014 respectively.