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Thursday, May 14, 2020 / 04:00 PM / by Debtors Africa / Header Image Credit: EcoGraphics
This report represents a
culmination of a detailed review of the credit experiences of local Nigerian
banks in the last two decades and reveals the challenges of a local lending
cycle that has seen lenders become victims of the tyranny of bad and delinquent
debtors.
The report makes a case
for a new approach to the lending cycle to ensure that integrity,
professionalism and evidence-based best lending practices are strictly followed
to guarantee the sustain ability of the financial system and the prosperity of
the larger economy.
Having invested years of
resources in evaluating and monitoring the performance of the Asset management
Company of Nigeria (AMCON) in the resolution of delinquent loans acquired from
banks and the massive N6trn loan assets unrecovered by the institution, and the
increasing frustration of its asset management professionals (AMPs) who have
found the convoluted debt recovery process soul-crushing and uninspiring,
redesigning the delinquent debtor management algorithm has become inevitable.
The nature of this new framework is laid bare as the report explains why things
can no longer remain the same. The strategic imperatives of a post novel
coronavirus (COVID-19) world is to make the new lending environment too toxic
to accommodate bad borrower behaviour. That being said, the new environment
would also play to the inalienable rights of borrowers to access loans and pay
back within the norms of revised lending terms if unavoidable circumstances
such as the global COVID-19 pandemic occurs and is understandably outside the
control of either lenders or borrowers.
A case is made for the
Federal Competition and Consumer Protection Commission (FCCPC) to be alive to
the changing requirements of its responsibilities as business uncertainty and external
shocks become increasingly common and evidently more damaging than in the past.
For example, the Council has not spoken about the potential for a likely
worsening of bank loans and advances as businesses see their turnovers and
hence profits wiped out by the consequences of COVID-19. The council has also
been quiet on the issues of the rights of borrowers and the potential loan
resolution mechanisms that are available to solve conflicts between borrowers
and lenders which are outcomes likely to accelerate in the coming months of
2020.
The FCCPC in a post
COVID-19 world must become proactive rather than reactive. The digital register
of delinquent debtors could easily raise issues of consumer privacy but in a
situation where the consumer breaches the original terms of an established loan
contract the issue of privacy may be considered mute. As noted earlier, for
economic growth to become visceral, the tyranny of the debtor over the creditor
must be discouraged.
In the past the emphasis
was on Investor protection but in the new economic landscape loan creation will
be just as important as debtor integrity and so debtor protection would become
a new ballgame that umpires must watch closely to ensure equity and fairness in
favour of all parties to the lending process, lenders and borrowers alike must
operate with utmost good faith, in other words entering loan transactions with
Uberrimae Fidei. After the COVID-19 pandemic has abated the Nigerian economy
will not spin on the head of a pin but on the integrity of its credit system.
Linking A New Reality
The
debtorsafrica.com report provides interesting related links that expand the
credit market outlook of principal money market actors, regulators and
financial analysts on issues around credit markets in Nigeria and how the
market needs to evolve to carry the burden of a nation in a hurry to meet the
expectations of a young, virile and digitally savvy population. other words
entering loan transactions with Uberrimae Fidei. After the COVID-19 pandemic
has abated the Nigerian economy will not spin on the head of a pin but on the
integrity of its credit system. The various links in the report allow users of
the document to survey the state of the lending business in Nigeria, the
institutions that are the dominant providers of credit and the challenges
credit providers have had with delinquent debtors. The report notes that the
Asset Management Company of Nigeria (AMCON) has found it difficult to meet the
responsibility of its mandate as a result of early errors in both loan
acquisition and funding aspirations. AMCON large loan portfolio has no
immediate exit valve. The institution and/or its successor will be stuck with
loans that may never be recovered, the painful experiences of AMPs in trying to
achieve sizable recoveries speak to the dim likelihood of loan writebacks.
The End of Hiding Behind A Finger
If
there is one characteristic that will define the success of winners and losers
in the new loan ecosystem it is transparency, banks hiding delinquency behind a
stump of grass will soon discover that their nakedness is as clear as that of a
day-old baby. The only way for banks and their borrowers to create a
sustainable credit environment is for them to stand digitally undressed, with
the delinquent borrower's character open to the world to see and make judgment
calls.
A bank
must become as transparent as its borrowers to validate its credit process, no
bank can claim transparency without a digital footprint that enables engagement
with recalcitrant and delinquent borrowers in the court of character evaluation
and credit history. If banks do not publish the list of their delinquent
debtors on a searchable data base, they create a systemic challenge that hurts
all lending institutions and gives delinquent debtors an avoidable advantage in
gaming the credit system. A Searchable data base of delinquent borrowers
enables fast assessment of the character of a prospective customer. Of equal
importance is that investors can use the data base as a starting node for
assessing the quality of management of a business they intend to either partner
or invest in.
Credit
agencies can also make use of the data base as a source of quickly searching
the credit position of a number of loan applicants across lending institutions.
The data would serve as a backup fact check to information already in their
possession.
They
would also benefit from the periodic reports and evaluation of domestic loan
markets across the African continent and add this body of knowledge to the
refinement of their credit reports and assessment of individual borrowers and
the state of the credit exposure of different industries continent-wide.
The Post COVID-19 Age of Credit
Lenders
are condemned to a new age. An age where the character of borrowers must be
established as a more critical and pronounced part of the lending process. The
review of a borrowers character as depicted by a borrowing history (captured by
Credit Bureaus) and a digital registry of delinquency (captured by
debtorsafrica.com) will combine to add rigour and sharpness to the process of
approving loans. In the post COVID-19 period loan default and delinquency will
naturally escalate. However, part of the process of default mitigation would be
debt resolution compelled by negotiations around loan workouts, this would be
the preferred option for most borrowers as a digital registry of delinquency
would provide a permanent public record of hardcore loan indebtedness until
resolution with the lending institution. The register would be updated by the
lending institutions as the borrower makes good on paying down agreed
outstanding liabilities.
The
digital register would be managed by each contributor and would be the
responsibility of such contributor to update the status of the loan. Where a
debtor pays in full and final agreement with the loan work out arrangement with
the lender, the contributor (lending institution) would be expected to remove
the name of the debtor and the debtors loan details from the schedule of
delinquent debtors on the loan register on the site. ·
In
subsequent reports, debtorsafrica.com in collaboration with its partner
Proshare Nigeria Limited, would include a deep dive on sectors adversely
affected by COVID-19 and the implications for the sectoral credit status of
each industry.
Sectors that would likely be most severely affected by loan delinquencies once the pandemic is over would include, but would not be limited to, the following:
Fintech companies in
particular could have a harsh time in loan recoveries post COVID-19 as the
majority of them do not have transparency mandates that would support their
recovery process. A situation where many people would have lost their jobs
during the COVID-19 period would make it difficult to enforce recovery as the
delinquency would be more a problem of revised individual cash flows than any
deliberate attempt at the avoidance of loan repayment.
The
Realities of Rising Loan Impairments
Nigerian banks, at
different times, have had to face bad patches of lending cycles with
non-performing loans as a proportion of loanable assets rising steadily as
liquidity shrank. More recently, this was seen in bank statement of financial
position between December 2015 and December 2018 when large-sized banks saw
their loans to the power and energy sector and the oil and gas business spiral
into trouble. The bigger money centre banks (DMBs) were more severely affected
than their smaller counterparts as asset concentration amongst the bigger banks
was more noticeable than their smaller rivals. The high credit concentration of
large cap local banking institutions meant that they were more vulnerable to
external shocks. The price shocks in the oil and gas sector and the cost
recovery difficulties in the power sector made for a cocktail of problems banks
found difficult to handle. Between 2015 and 2018 bank statements of financial
position had been pressed into a corner. In 2018, in particular, the
implementation of the international financial reporting standard Rule 9 (IFRS9)
on impairment provisions on a fair market value basis meant that
Oil &
Gas Steam Rollers And Power Headaches
The downturn in the
international oil market between 2015 and 2016 saw oil prices tumble from over
US$114 per barrel in July 2015 to US$52.29 per barrel in June 2016. The
reversal of international oil price fortunes between 2015 and 2016 resulted in
a decline in operating cash flows and a thinning of operating revenues which
flattened profits before tax, depreciation and amortisation (EBITDA). The
dramatic fall in oil revenues between 2015 and 2017 led to a dip in cashflows
and a fall in cash flow interest cover. The mild recovery in oil prices
between 2017 and 2018 resulted in a modest recovery of revenues amongst oil
companies but did not lead to a strong enough increase in net sales to cope
with the accumulating finance charges. The harsh fiscal position of the
oil companies was reflected in the difficulties they had in meeting growing
credit obligations between 2015 and 2019. The oil majors were victims of both
uncontrollable external factors and disappearing business rationale. The
assumptions which made business sustainable ere gradually but clearly being
eroded by sliding global oil prices, excess international supply and persistent
manufacturing inefficiency. The oil and gas "prosperity illusion" was
fading fast and banks were beginning to feel the effects of rising impairment
charges.
The problem with power
sector credit, on the other hand, was that most of the companies that were
given distribution licenses (Discos) were established on business models that
involved high capital leverage (with expectations of high return on equities
(ROEs)), this was a mistake on both the part of the companies themselves and
the banks that financed them. The high early leverage of the businesses of
power sector distribution companies meant that cost recovery had to be large
and fast to prevent credit default acceleration. Unfortunately,
the ability of discos to recover charges from customers was unimpressive
thereby shattering the initial cash flow projections upon which their business
models were premised. The cash flow miss-hits resulted in a few banks tallying
up heavy loan loss provisions and compressing operating earnings. The problems
of local Nigerian banks appear to be that of cyclical lending exuberance
similar to that of the cyclical investor exuberance that characterizes the
Nigerian stock market from time to time. Nigerian banks (especially the bigger
ones) seem to find it difficult to contextualize their credit appraisal
memorandums (CAMs) and lend against most likely business scenarios. The desire
for bragging rights over the relative size of their loan book and profits in
the last decade created the foundation for the massive loan recovery problems
that manifested between 2005 and 2018 (2019 saw a slowing down in the pace of
lending until the Central Bank of Nigeria (CBN) decided to increase the
loan-to-deposit ratio (LDR) of banks to 60% by September 2019 and 65% by
December 2019).
Credit
Expansion and New Loan Strategies: The Delinquency Register
Bank lending expansion has
historically involved a rise in non-performing loans (NPLs) as the pool of
bankable projects in the domestic money market are few and far between. A
few problems with credit creation by local banks include but are not limited
to:
A New
Paradigm For A New Reality
In walking through the
issues of resolution of delinquent assets of lenders, both banks and their
customers are going to have to enter into a new era of loan initiation,
disbursement and recovery/repayment. The old paradigm is stunted and suffers
from the following asset creation and management short comings:
The new paradigm, however,
assumes greater bank customer engagement and better pre-approval assessment and
monitoring. The new loan framework follows a different algorithm as represented
below:
Section 1 of the report expands on this theme against the background of an
anticipated increase in delinquent loans in 2020 caused by a downturn in business
spurred by the novel coronavirus pandemic (COVID-19). The likely rise in loan
delinquency in 2020 as a result of supply chain disruptions, health lockdowns
and suspension of corporate revenues may see bank's non-performing loans (NPLs)
take a turn for the worse in the year. The digital online register of
delinquent borrowers provided by debtorsafrica.com would, therefore, prove invaluable in the new
lending ecosystem. The site would dissuade borrowers from bad behaviour and
build a treasure trove of easily assessable data for global and national
lenders. The new reality would be a massive reduction in information asymmetry
and a better representation of an established nexus between borrower capacity
and character and lenders willingness to lend.
Section 2 of this report takes a helicopter view of the domestic credit market
and highlights its major characteristics, participants, and institutional
structures. The local credit market has evolved in sophistication but human
beings have not evolved in character. The governance compass in the corporate
management of local enterprises in Nigeria is yet to see a major shift and if
the business of lending is to grow sustainably over the next number of decades,
new approaches to the model of granting credit must be cleverly crafted and
firmly executed. A good place to start would be a national registry of "hardcore" bank debtors.
Section 3 of the report does a deep dive into the non-performing loan situation of
banks in the country. The section reviews the bank's profitability, asset
quality, liquidity and leverage. Also, the section will review the
sectoral distribution of hard-core debts and the impact of debtor
characteristics on the growth of the domestic debt market.
Section 4 tackles issues of regulation and reviews regulatory provisions and
approaches to debtor resolution.
Section 5 discusses the bank debtor list and looks at the way a digital register
of core and delinquent debtors could change the framework for the management of
loan delinquency with greater effect. The new model goes beyond naming
and so-called "shaming" to informing prospective creditors and
other institutions that require character validation
Section 6 does a wrap up of the report and fleshes out the details of the new
approach to managing debtor information, storage retrieval and referencing. The
section explains how a searchable digital register of delinquent debtor would
provide the new frontier of handling delinquency as it makes a case for a review
of the country's bankruptcy laws.
Section 7 handles the "data bank" of the report providing the evidence-based pool
of numbers upon which the report's analysis was premised. The section provides
a mother lode of data on banks loans and deposits as well as operating
performance over the last decade.
Stripping Delinquency of Its Secrecy
The banking sector, over
the years, has been built on a raft of secrecy and confidentiality. A
by-product of the culture of silence on bad conduct has been the exploitation
of the rule by bad borrowers to support a system of increasingly non-performing
loan (NPL) assets. Post COVID-19 the occurrence of delinquent bank loans would
rise but a strong digital foray to unmask bad behaviour would strengthen the
lending system's integrity as borrowers become circumspect about reputational
damage that could result from flagrant disregard for loan repayment.
To counter the spike in
borrowing misconduct, the Central Bank of Nigeria (CBN) on August 26, 2019
issued a circular to all banks, BSD/DIR/GEN/LAB/12/054 Letter To All Banks New
Offer Letter Clause For Credit Facilities, stating, among other things, that:
1.
With effect from August 26, 2019, the terms and
conditions in offer letters and loan agreements must among others, contain the
following undertaking to be signed by prospective obligors: I hereby waive any
right of confidentiality whether arising under common law or statute or in any
other manner whatsoever and irrevocably agree that I shall not argue to the
contrary before any court of law, tribunal, administrative authority or any
other body acting in any judicial or quasi-judicial capacity."
"By signing this offer
letter/loan agreement and by drawing on the loan, I covenant to repay the loan
as and when due. In the event that I fail to repay the loan as agreed, and the
loan becomes delinquent, the bank shall have the right to report the delinquent
loan to the CBN through the Credit Risk management System (CRMS) or by any
other means, and request the CBN exercise its regulatory power to direct all
banks and other financial institutions under its regulatory purview to set-off
my indebtedness from any money standing to my credit in any bank account and
from any other financial assets they may be holding for my benefit.
I covenant and warrant
that the bank shall have power to set-off my indebtedness under this loan
agreement from all such monies and funds standing to my credit/benefit in any
and all such accounts or from any other financial assets belonging to me and in
the custody of any such bank.
I hereby waive any right
of confidentiality whether arising under common law or statute or in any other
manner whatsoever and irrevocably agree that I shall not argue to the contrary
before any court of law, tribunal, administrative authority or any other body
acting in any judicial or quasi-judicial capacity."
The CBN
by the circular removed the secrecy that hid banks and their debtors from the
punishing rays of lending/borrowing clarity. The new law represents the
beginning of what we have come to advocate as the new approach. A systemic
realignment of the Credit system around the principles of transparency and
disclosure.
Related Reports (PDF)
1. Download the Full PDF Report - Debtors Africa, May 13, 2020
2. Executive Summary PDF - Proshare, May 14, 2020
3. AMCON and Financial Services Debt Burden in Nigeria - Aug 17, 2018
Related News
1. AMCON and Financial Services Debt Burden in Nigeria - Aug 17, 2018
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