Between Credit Risk Mitigation and Customer Satisfaction

In order to ensure that the bank is not exposed to undue risks, Stanbic IBTC has developed a framework for adhering to laid down guidelines before granting loans to its customers, writes Obinna Chima

The significant rise in the level of nonperforming loans (NPLs) in the banking industry clearly requires banks to put in place stringent risk management policies that would help them safeguard depositors’ funds.

This is also necessary to ensure that the financial system remains stable.

Indeed, following the drop of low oil prices, dwindling oil revenue, foreign exchange scarcity and a crippling recession, the last two years saw intense weakening of the macroeconomic environment, resulting in a deterioration of asset quality and rising NPLs in the banking industry, from about five per cent to 15 per cent presently. This has remained a source of concern to both the banks and the regulators.

Normally, risk is regarded as a threat to a bank’s steady flow of income. Risk management is, thus, the identification, assessment, and prioritisation of risks, followed by coordinated and effective application of resources to reduce, monitor, and control the probability and/or impact of disastrous events.

It is also the process by which managers identify key risks, obtain consistent, understandable, mitigating measures, choosing which risks to avoid or reduce and by what means, and establishing procedures to monitor the resulting risk position. The essence of risk management, according to the Central Bank of Nigeria (CBN), is to detect prospective problems before they become actual problem, and the implementation of an enterprises wide strategy to manage those risks. Thus, an ideal risk management programme assists an enterprise to steer clear of potential risks before they occur throughout the life of the product or project. Risk is the possibility, likelihood or chance that something unpleasant or unwelcomed will happen that is capable of damaging an asset, or all of the original investment or the possibility of financial loss.

More precisely, risk is the possibility of damage or any other negative occurrence that is caused by external or internal vulnerabilities, which may be avoided through preemptive action. Risk is commonly associated with uncertainty, as the event may or may not happen.

Therefore, a risk management design includes tools or methods of analysis that allows an organisation to reduce, delay or avoid likely risks.

The rational approach to risk therefore, is at the very least, to restrict exposure to it, ideally to avoid it all together.

This clearly was the situation that Stanbic IBTC Bank found itself in its case with Infinity Snacks and Beverages Limited, which is now a subject of litigation.

Contrary to a recent media report that Stanbic IBTC Bank Plc reneged on an agreement with the food manufacturing company, THISDAY gathered from a reliable industry source that the latter that did not adhere to the terms of its contract with the bank.

The source also clarified that Stanbic IBTC is not a financial partner of Infinity Snacks and Beverages Limited, as erroneously stated in the media report, but that what existed between both organisations is a bank-customer relationship.

The source who pleaded to remain anonymous alleged that: “Infinity Snacks and Beverages Limited went to Stanbic IBTC a couple of years ago for a facility of about N700 million. “What then happened was that they were struggling to pay back the debt. Thereafter, they applied for a Bank of Industry’s (BoI) loan, which the bank graciously assisted Infinity Snacks to secure.

“But because of the outstanding debt, Stanbic IBTC gave Infinity Snacks and Beverages some conditions before it would disburse the BoI facility, but the breakfast cereal manufacturer didn’t meet the conditions.”

Due to this, the source disclosed that the bank returned the fund to BoI so that its reputation would not be smeared. “So when the management ofInfinity Snacks and Beverages got to the bank and were told they didn’t meet the conditions and that the money had been returned, they started deploying various tactics not to settle their outstanding debt,” the source added.

Infinity Snacks also accused the bank of supporting one of its competitors –Multipro Enterprises Limited, who are franchisees of Kellogs Breakfast Cereals in Nigeria, an allegation the source described as baseless.

“How Multipro Enterprises Limited, manufacturers of Kellogs Cereals came into this matter has been baffling me because there are no laws that forbid a bank from supporting firms playing in same industry. What is important is the ability of the firm(s) to meet the conditions,” he added.

Attempts to get details of the transactions from the bank were not successful as it insisted that it is currently a subject of litigation. It however stressed that in dealing with its customers, it does not place the interest of any client above that of others.

“Consequently, the matter is subjudice and we do not feel it is appropriate for us to discuss same on the pages of a newspaper. However, we can assure you that at all times Stanbic IBTC acted in accordance with the terms of its agreement with Infinity Snacks.

“We also wish to assure you that, as a matter of practice, when dealing with different clients, we do not place the interest of any client above that of any other client or clients,” the bank explained.

The foregoing shows that financial market operators, by and large, face a considerable number of risks which underscore the need for effective risk management to ensure the stability of the financial system.

According to the CBN, the stability of the financial system is a major challenge to the regulatory authorities, given the implication of its disruption on account of the insolvency of any operator on the economy and beyond. The CBN, mindful of the challenges posed, has reorganised/streamlined its internal structure to boost service delivery and enhance its capacity to better supervise the industry.

Nonetheless, image management is indispensable for the financial service industry, since it defines how others relate to the bank, as well as how much faith and trust savers and other stakeholders will place on a bank.

Like attitude, the reputation of a bank – one of its priceless assets is most at risk if a bank suffers a material loss through bad risk management.