March 04, 2011
The resolution of the bad debts of banks is currently eliciting the unintended reaction from some key stakeholders. Debtors are challenging banks to a battle, with the onus now on the Asset Management Company of Nigeria (AMCON) to protect the system. Emele Onu examines the unfolding impasse.
Possibly owing to the relative small size of the Nigerian economy, the same big debtors run across the bank and they are noted to have personal relationships with the banks chiefs- as result of one or many of the following: common ownership interest in companies, common membership of clubs and associations, ethic affiliations or shared political interest or connection, among others.
However, to protect shareholders’ and depositors’ funds, banks chiefs try to deal with the big men or borrowers at arm’s length during the loan consideration, delivery and administration process.
An arm’s length transaction is a transaction between two parties who may have a personal relationship but the transaction is kept separate (at arm’s length) to the extent that the personal relationship won’t interfere during due diligence, verifications and decision taking. The interest of the banker is to make the transaction “business-like”, but that is not always what the borrower that intends to get some advantage from his personal relationship with the banker wants. But at the point of due diligence on the loan, the banker calls the shot, so the borrower goes home the “loser”.
The drama changes immediately the big borrower obtains the loan. The experience in Nigeria is that once the big borrower has mopped up the liquidity in the bank, which sometimes may exceed the regulated obligor limits, he beats the drum while the banker dances to the tune.
That trend is witnessed at present. The big borrowers have redefined arm’s-length to mean avoiding the banks as much as possible, while the banks struggle to bring them (the debtors) closer and to renegotiate terms of repayment as friends (no longer preaching arm’s length), but that is still not yielding result.
There are reports that the bank debtors, having spotted loopholes (real or imagined) or escape routes through the asset purchase window of AMCON, are rendering supposedly performing loans non-performing. Financial market observers see strong abuse of privilege in the whole set up. What is the situation really like?
Emergence of recalcitrant bank debtors
When the meltdown brought banks almost to their knees over non-performing loans inflicted on them by few powerful individuals, the CBN disclosed that 10 Nigerians were owing the banks over N1 trillion.
The CBN realised a list of billionaire debtors to the banks following its joint examination of the sector with the Nigerian Deposit Insurance Corporation (NDIC) as well as the intervention in some banks in August and October 2009.
In publishing the list, the CBN Governor, Mallam Sanusi Lamido, explained that the publication was not just for debt discovery, but to expose the powerful people that were aiding the collapse of the banks.
The debtors’ list showed that the first five rescued banks had total non-performing loan of about N746.99 billion, led by Oceanic Bank’s N278.204 billion; Intercontinental Bank, N210.903 billion; Union Bank, N73.582 billion; Afribank, N141.856 billion and Finbank, N42.445 billion. Bank PHB had N170 billion and Spring Bank, N95 billion. ETB recorded N46 billion; Unity Bank, N37 billion and Wema Bank, N101 billion.
Although the CBN – appointed managers of the rescued banks made effort to recover the non-performing loans, only a small fraction of the money was recovered and from an equally negligible number of debtors, definitely with many of the big borrowers missing in the complaint list.
As a resolution vehicle for the non-performing loans, AMCON on December 31, 2010, issued so called consideration bonds with a 10.125 percent yield valued at N1.036 trillion for the purchase of the debts of 21 banks which amounted to about N2.2 trillion. The exercise saw Union Bank exchanging its non-performing loans for consideration bonds worth N239 billion, Oceanic Bank receiving about N200 billion and Intercontinental Bank N146 billion, among others.
It was not anticipated by AMCON or the bank that debtors could later work towards packaging their facilities to AMCON wilfully and tactically and for ulterior motives.
The big borrows, according to THISDAY findings, are preferring the courts to their banks for loan settlement in the belief that the judiciary matters will rest for a long time, without the banks getting back their money.
This development, said a banker, is lingering and will affect negatively genuine and credible business men and women that approach banks for loans.
Since the banks make money out of their intermediation role, any stumbling block in the way of their trade could be traumatic.
The Dilemma of the Banks
One of the second generation banks with headquarters on Victoria Island of Lagos is said to be in a battle with one of its biggest borrowers over the stopping of interest payment on the loan of the customer after AMCON came on board and made their first loan purchases.
It was gathered that the big debtor, who is a key player in the various sectors of the economy wants the facility to go bad so that AMCON could come in.
“We were surprised at the behaviour of the customer especially in the realisation that his businesses are doing well and he can continue servicing his debt until it is liquated”, an official of the bank who didn’t want his name or that of the customer on print said.
Besides that, most of the nation’s banks are worried by what they call “new tactics” by debtors to achieve the purposes already highlighted and some other ends.
A top manager with one of the banks, also pleading anonymity said “debtors are resorting to mischievous tactics using the media, both print and electronic to embarrass and impugn the reputation of banks rather than engage banks on repayment terms on their debts”.
The senior bank official said debtors are going that way believing that ‘causing the banks and their principal officers public embarrassment would keep the banks at bay’ and offer some succour to them (debtors) when demands for fulfilment of the debts are made.
The bankers are also accusing the media of being willing collaborators to the big borrowers, whom, it was said, deploy media – mainstream, soft and new media’ to aid their propaganda and activities.
Expectedly, shareholders of the banks have cried out over the smear tactics of the debtors, which they said could nail a bank.
Giving a perspective of the shareholders recently, the National Coordinator of the Progressive shareholders Association of Nigeria (PSAN), Mr. Boniface Okezie said banks should not be bothered by whatever antics that are employed by the debtors and to ensure that all the debts are recovered to reposition and strengthen the financial institutions.
“When the banks lend money to individuals and they pay back, the same money is given to other people. That is how banks contribute to the growth of the economy and also make money for their owners. Unfortunately, besides using the media, the same bad debtors go to court to get injunction to avoid their arrest or to stop the bank from taking any further action. The public should know who the enemies of the banking system are”, he added.
The Readiness of AMCON to Deal with the Situation.
Good a thing, AMCON looks ready to take up the challenge and deal with the matter squarely. AMCON has said it would penalise severely any bank debtor that is discovered as working towards subverting the good intentions for the establishment of the Corporation.
The Managing Director of the Corporation, Mr. Mustapha Chike-Obi, told THISDAY that it was possible for some debtors in the banks to plot ways to circumvent the system but that “AMCON will deal harshly with such debtors when identified”.
The AMCON boss, who was responding to questions on the assertion that some debtors were approaching AMCON to get better terms on their facilities rather that negotiate with their banks, however said the Corporation has not seen any such persons.
Commenting on alleged intention to convert performing loans to non-performing, by debtors, with the mind that if such loans are passed on to AMCON they (the debtors) will get better repayment terms, Chike-Obi said, “debtors won’t get better terms when AMCON restructures their loans”. He added that the Corporation would rather deal harshly with stubborn debtors.
Analysts have said a proactive approach by the CBN and AMCON would beat thee debtors in their own game. That seems the case if the position of the banking regulator is anything to go by.
The CBN expressed concern recently over the new tactics by some debtors to evade their debt repayment obligations to the creditor banks.
The CBN Deputy Governor, Financial System Stability (FSS), Dr. Kingsley Moghalu, said that the apex financial institution “will be working with law enforcement agents to protect banks from the menace of harassing borrowers”.
Fielding questions during a conference on risk governance for board of directors and senior managers of banks recently, Moghalu said the apex bank would take steps, working in concert with the security agencies, to check the menace of borrowers who go about harassing creditor-banks.
“The CBN is not folding its hands on the development. Going forward, we are going to be taking every step together with concerned authorities to help protect banks from the menace of harassing borrowers. It is a very appalling situation, but we are doing something about it”, Moghalu assured.