Banks, Loans and Bad Debts
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"