THISDAY

Banks, Loans and Bad Debts

- ADERINSOLA FAGBURE afag­bure@ya­hoo.com Business · Finance · Personal Finance · Belarus · Nigeria · Iceland · Belgium · Sony Music · Austria · Asset Management Corporation of Nigeria (AMCON) · Etisalat · Stock Exchange of Thailand

INPLs n the past few weeks, the busi­ness col­umns have been awash with ar­ti­cles dis­cussing the takeover of Eti­salat by the man­age­ment of the As­set Man­age­ment Cor­po­ra­tion of Nige­ria (AMCON), be­cause of the telecom­mu­ni­ca­tions op­er­a­tor’s in­abil­ity to ser­vice its dol­lar de­nom­i­nated loans. It was said that the debtor com­pany be­gan to ex­pe­ri­ence cash flow chal­lenges fol­low­ing the steep de­val­u­a­tion of the Naira, re­sult­ing in its in­abil­ity to pay its $1.2bil­lion loan. It is no news, that our banks are heav­ily bur­dened by Non- Per­form­ing Loans (NPLs), with fig­ures near­ing N15tril­lion. Re­ports fur­ther in­di­cate that the huge loans bor­rowed from lo­cal banks by in­vestors that ac­quired oil and gas and power sec­tor re­lated as­sets, have fur­ther bur­dened bank loan port­fo­lios.

Unan­swered Ques­tions The Eti­salat saga, leaves sev­eral ques­tions unan­swered. One won­ders whether the con­sor­tium of banks in­volved in the trans­ac­tion, had been risk con­scious enough to ad­e­quately pro­vide for the debt. The ques­tion as to whether Nige­rian banks, have con­cen­trated only on a se­lect set of cus­tomers in giv­ing out some of these large loans, can­not be swept un­der the car­pet. This is be­cause, of­ten, when the list of bank debtors is made pub­lic, the same set of high net worth in­di­vid­u­als and in­dus­tries, run through all the bank debtor lists. An un­healthy em­pha­sis, seems to have been placed on large play­ers, as op­posed to small busi­nesses. A pro­moter of an SME like my “Ore” (friend) down the road, who runs a hair­dress­ing sa­lon and needs to buy an in­verter be­cause of the er­ratic power supply, will be found in­el­i­gi­ble for a loan with most com­mer­cial banks. In the event that she is con­sid­ered, she will be asked to present her great grand­mother’s grave as col­lat­eral.

Hur­dles in Loan Re­cov­ery: In the cause of prac­tice, I get to re­view loan doc­u­ments and set­tle dis­putes be­tween lenders and bor­row­ers, and the re­cov­ery rate is usu­ally low be­cause of se­cu­ri­ti­sa­tion chal­lenges, faulty pro­ce­dures for grant­ing loans, as well as de­fec­tive re­cov­ery strate­gies.

Es­tab­lish­ing Amount of Debt The hur­dles, be­gin with the process of es­tab­lish­ing the ex­act amount of the debt. Es­tab­lish­ing the debt from the records of the bank is usu­ally dif­fi­cult, with the cred­i­tor and debtor of­ten be­ing in dis­pute over the debt sum. The ser­vices of a fi­nan­cial ex­pert is usu­ally sought to iron out is­sues, at ad­di­tional cost to both par­ties. This is wors­ened by the fact that, quite a num­ber of the rel­e­vant and re­quired bank doc­u­ments in­clud­ing the orig­i­nals or duly ex­e­cuted copies, may not be found.

Poor Credit Ad­min­is­tra­tion of Fi­nan­cial In­sti­tu­tions

The credit ad­min­is­tra­tion process of these in­sti­tu­tions, is many times very poor, lead­ing to low qual­ity credit fa­cil­i­ties be­ing dis­bursed. Many a time, the project be­ing fi­nanced may not have been prop­erly ap­praised, and the fa­cil­ity not ef­fec­tively man­aged, such that sources for re­pay­ment, are not ad­e­quately se­cured. Banks and their reg­u­la­tors, may need to dis­cuss new ap­proaches, to con­duct­ing ef­fec­tive due-dili­gence and pro­mot­ing the early de­tec­tion of bad debt tell-tale signs in­clud­ing de­fec­tive se­cu­rity and fea­si­bil­ity re­ports. It is not un­heard of, to find that the ad­min­is­tra­tion of col­lat­eral for a credit fa­cil­ity, is usu­ally be­low stan­dard, giv­ing rise to le­gal im­ped­i­ments in en­force­ment. There have been in­stances where multi-mil­lion dol­lar fa­cil­i­ties, have been given with the per­sonal guar­an­tee of the rel­a­tively un­known di­rec­tors, as the only form of se­cu­rity. It is ridicu­lous to find that some­times the per­sonal guar­an­tee re­quire­ment, is waived at some point by the bank upon dis­burse­ment of the loan, due to un­clear rea­sons.

At­ti­tude of Debtors Another chal­lenge is the at­ti­tude of the debtors, most of whom are very un­will­ing to meet their obli­ga­tions, even when they are ca­pa­ble. Some big play­ers take loans with the in­ten­tion of never re­pay­ing them, while oth­ers di­vert busi­ness loans for per­sonal use. Imag­ine a bank dis­burs­ing a loan for the pur­pose of pur­chas­ing ma­chin­ery for a tomato fac­tory, and the di­rec­tor de­cides to buy a man­sion on some ex­otic is­land. Your guess is as good as mine, the loan is bad, ab ini­tio!

Ef­fi­ciency of Reg­u­la­tors By reg­u­la­tory stan­dards, banks are ex­pected to op­er­ate a Credit Port­fo­lio Clas­si­fi­ca­tion sys­tem. This im­plies that these fi­nan­cial in­sti­tu­tions, are ex­pected to re­view their credit port­fo­lio con­tin­u­ously (at least once ev­ery a quar­ter), with a view to recog­nis­ing any de­te­ri­o­ra­tion in credit qual­ity. Such re­views should sys­tem­at­i­cally and re­al­is­ti­cally clas­sify banks’ credit ex­po­sures, based on the per­ceived risks of de­fault. The as­sess­ment of risk de­fault is based on cri­te­ria which should in­clude, but are not lim­ited to, re­pay­ment per­for­mance, bor­rower’s re­pay­ment ca­pac­ity on the ba­sis of cur­rent fi­nan­cial con­di­tion, and net re­al­is­able value of col­lat­eral. This forms the ba­sis for the use of the terms per­form­ing and non-per­form­ing. In the light of the Eti­salat and other re­lated cases, one won­ders at the level of proac­tiv­ity of the banks, and the level of ef­fi­ciency of the reg­u­la­tors.

Cum­ber­some and Un­re­li­able Le­gal Regime In my view, one of the most sig­nif­i­cant chal­lenges is the le­gal regime for debt re­cov­ery in Nige­ria, which is very cum­ber­some and un­re­li­able. The process of re­cov­ery through lit­i­ga­tion is costly, time con­sum­ing, and fraught with un­rea­son­able tech­ni­cal­i­ties. Var­i­ous fac­tors such as, de­lay in court pro­ceed­ings, abuse of the con­sti­tu­tional rights to fair hear­ing which al­lows a debtor his day in court, third party claims among oth­ers, have posed se­ri­ous chal­lenges in re­cov­er­ing bad debts. Even where judge­ment is ob­tained, ex­e­cu­tion is also fraught with sim­i­lar le­gal com­pli­ca­tions. There is an ur­gent need to en­cour­age the in­cor­po­ra­tion of ADR meth­ods, into the debt res­o­lu­tion process. This way debtors and cred­i­tors, can have ac­cess to pri­vate tri­bunals that can re­solve is­sues speed­ily.

In my pre­vi­ous ar­ti­cles I men­tioned the ad­van­tages of hav­ing ef­fi­cient credit rat­ing sys­tems and debtors’ in­for­ma­tion shar­ing plat­forms. It can­not be overem­pha­sised that, it is im­por­tant to have a com­pre­hen­sive registry of all bank debtors within the coun­try. This will also en­cour­age col­lab­o­ra­tion among pri­vate and pub­lic ac­tors, in or­der to pro­mote sta­ble mon­e­tary and eco­nomic poli­cies, which of­ten lead to un­com­pet­i­tive credit terms.

"THE QUES­TION AS TO WHETHER NIGE­RIAN BANKS, HAVE CON­CEN­TRATED ONLY ON A SE­LECT SET OF CUS­TOMERS IN GIV­ING OUT SOME OF THESE LARGE LOANS, CAN­NOT BE SWEPT UN­DER THE CAR­PET. THIS IS BE­CAUSE, OF­TEN, WHEN THE LIST OF BANK DEBTORS IS MADE PUB­LIC, THE SAME SET OF HIGH NET WORTH IN­DI­VID­U­ALS AND IN­DUS­TRIES, RUN THROUGH ALL THE BANK DEBTOR LISTS"

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Bank­ing Hall
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