Debtors & Recovery | |
Debtors & Recovery | |
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Thursday, 23 July 2020 / 13:57PM / Adesola Borokinni and Adaeze Nwachukwu,
Proshare Research / Header Image Credit: Ecographics
Recent statements by the Central Bank of Nigeria's (CBN's) asset
resolution company, AMCON, and in particular, the Managing Director (MD) on the
matter/in regards to the likelihood of public sector resources being used to
clean-up N5trn in toxic banking sector loan assets. Analysts have noted that
AMCON's conjecture may have been propped by a mistaken premise.
Specifically, we refer to the pronouncement documented in the PointNG
news story titled - Nigerian
tax payers may bear burden of unrecovered N5tn debt, AMCON warns of July 19, 2020.
Coming after our release of the May 13, 2020 Debtors Africa Report
on debtors and NPL's in banks, and the
extensive work done thereafter; it was another example of misinformation that
needed to be addressed, especially one from the regulator.
The resolution company created in 2010 at the height of the asset
delinquency challenges faced by banks at the time raised N1.7trn by way of a
bond issue to the CBN to buy off toxic assets from banks and reinject fresh
funds to support systemic liquidity and protect depositor liabilities. The
arithmetic of the current situation suggests that so far AMCON has recovered
N1.1trn which represents 65% of the amount committed by the company to the
protection of domestic deposit liabilities and systemic stability.
The N5trn alluded to by, Mr Ahmad Kuru, the incumbent chief executive of
AMCON, refers to the face value of the toxic loans outstanding.
A number of clarifications need be set as follows:
At its inception, AMCON identified 10 banks with
systemic credit challenges and subsequently injected N736bn liquidity to buy up
the toxic assets. With the structured repayment plan under a sinking fund
arrangement the suggestion that public funds would be needed to cover the
indebtedness of the banking sector is odd.
The evidence available indicates that with expansion
in bank-wide total assets as the economy picks up will lead to accretions to
the sinking fund which in turn would write-off toxic asset size over time.
Furthermore, the growth in the domestic economy would increase asset values and
make the local investment market more attractive resulting in fresh funds
flowing into the real estate business as foreign direct investors buy into the economy
in search of superior market yields, enabling AMCON sell off stranded assets at
tidy profits , thereby paying down the N5trn delinquent loans on the resolution
company's balance sheet.
Understanding the State of Play
Since its inception AMCON has acquired over 12,000
non-performing loans worth N3.7trn from 22 commercial banks and injected over
N22trn as financial accommodation to 10 banks. AMCON has been able to recover
over N1.1trn while its total obligation to the central bank of Nigeria was over
N5trn. In a recent presentation by Mr. Aliyu Kalgo on behalf of AMCON's boss,
Mr. Ahmed Kuru, Kalgo noted that AMCON was unable to recover its outstanding
debt of over N5trn and noted that the debt burden would become the debt of the
federal government and local taxpayers.
The statement, though well-meaning, wrongly interprets
the financial accommodation principle guiding the establishment of AMCON. The
financial accommodation meant that AMCON was to recover what it paid for toxic
loans. The bank's sinking funds were expected to pay for the majority of the
liabilities of the banks. The difference between the bank's loan purchase
amount and the balance with AMCON was referred to as 'financial accommodation'.
Therefore, financial accommodation was not AMCON's responsibility to recover
but that of the banking system through a sinking fund.
According to the guiding principle of its
establishments, the taxpayers should not be a party in the debt recovery
process. Major parties to credit recovery include AMCON itself, the CBN,
Deposit Money Banks (DMBs), Credit Bureaus, NDIC, and delinquent debtors.
Therefore, recoveries by AMCON, note financial analysts, cannot be used as a
fiscal cushion to help plug budgetary gaps of the federal government and
neither should the debt burden resulting from an inability to recover toxic
loans be shifted to taxpayers. Therefore, as far as corporate finance
professionals are concerned, AMCON at no time had the legal right or fiscal
responsibility to give the federal government money for whatever purpose
neither does it have the right to transfer burdens of debt.
A grey area that is yet to be properly clarified is
the role of NDIC. NDIC was saddled with the role of charging insurance premiums
on the deposits of distressed institutions. The insurance premiums charged were
supposed to insulate depositor's funds in the case of the collapse of a bank.
Therefore, NDIC's role was faulted as there was no reason for NDIC to collect
insurance premiums during bank failures when AMCON was covering the cost.
But the NDIC has collected premiums from banks which
were beneficiaries of AMCON intervention meaning that AMCON was paying money to
the federal government through NDIC. According to ChikeObi, "if the
adjustments for NDIC payments to the federal government by way of premium
payments on deposits are added to the taxes paid to the government by now
profitable banks the money made available to the federal government by AMCON
would be in the region of N2trn."
The New Grail
To validate Proshare's position, a discussion with Mr. Mustapha Chike-obi, erstwhile chief executive of AMCON, gave some confirmation of the evidence-based arguments. According
to Chike-Obi, all AMCON needs to recover is what it paid for the loans. The
recovery of the balance of the face value of loans outstanding on the asset
resolution company's books was to be amortized and recovered by a sinking fund
created for the industry's toxic assets. The bank's loan purchase amount was
about N1.7trn, the balance of N4trn was what AMCON called, 'financial
accommodation'. The accommodation was supposed to be paid back by the sinking
fund, and represents what the banks at the time had lost. Based on this playbook,
Chike-Obi believed that it was incorrect to say that AMCON bought loans of
N6trn.
The sum of N6trn represents the face value of the
loans outstanding at the time of intervention but did not represent the amount
that AMCON paid. The N6trn was made up of N1.7trn that AMCON paid for eligible
loans (EBLs) and N4.7trn represented the money that AMCON gave to the banks
as financial accommodation to ensure that depositors were
protected from loss. The financial accommodation was not AMCON's responsibility
to recover but that of the banking system through the sinking fund.
According to Chike-Obi, "Sanusi and I
discussed mentioning the face value of the loans, and Sanusi prevailed that we
should make the face value of the loans public in line with policy transparency
and adherence to proper corporate governance standards. Sanusi felt this would
give the loan resolution body greater flexibility in pursuit of recovery"
"If a borrower was in a hole for N1bn, AMCON
only needed to go for recovery of between N300m and N400m, but Sanusi felt that
the agency should go for the full face value of the loan thereby putting a
lesser burden on the systems sinking fund".
Chike-Obi also noted that the highest recovery rate
globally, occurred in Malaysia which was about 58%. AMCON's target was 70%
asset loss recovery. So, of the N1.7trn the agency paid for bank loans, its
actual target was 70% of that or what came to roughly N1.2trn. AMCON presently
has recovered about N1.1trn according to the current Chief Executive of AMCON,
Ahmed Kuru. The N1.1trn recovery represents 92% of the debt resolution
company's target of 70% recovery of its N1.7trn paid to banks. Based on these
numbers, Chike-Obi may be correct in stating that the agency has done a good
job of meeting its initial debt resolution mandate. Chike-Obi's position may be
at variance with the frustration of the agency's asset management partners
(AMPs) who have expressed concern over the style and strategy of the agency in
recovering delinquent debt, but premised on targets set by the CBN for the
body, AMCON appears to have delivered on the original agency target.
An interestingly compelling point that Chike-Obi
equally makes concerning the recently mentioned N5trn face value of AMCON debts
is that no bank would sell for 40kobo on every 100kobo face value an asset it
strongly believed was worth at least 60kobo on the naira. Besides, Chike-Obi
also noted that a number of the banks had already made certain provisions for
the diminution in loan asset values on their profit and loss (P&L)
accounts.
So how does CBN come in on the issue of bad bank
loans? Chike-Obi argues that CBN has nothing to do with bad bank loans. In his
words, "CBN bought AMCON bonds worth N5trn, the question is whether CBN
can recover the N5trn invested in AMCON bonds? From AMCON's model, the CBN is
getting N400bn a year from the sinking fund. The CBN should get its money back
if not in 10 years then in 15 years. So, what the CBN has on its books is AMCON
bonds". The bond is being serviced by the sinking fund and AMCON. CBN
has nothing on its books on AMCON other than the bond investment.
A tricky area of AMCON's playbook is a situation where
the agency recovers more than was required by the recovery formula, suppose a
N1bn debt AMCON was required to recover N300m (30kobo on a naira). Suppose
AMCON recovers N500m, does the additional N200m go to the sinking fund? No, it
does not.
Chike-Obi agreed that one of the most profitable aspect of the AMCON delinquent debt was the loans without collateral that were purchased at 5%. Many of these debts, according to Chike-Obi, "were recovered 100%". The excess of money recovered over and above that required by the AMCON recovery target goes into a pool of recovered loans. The former AMCON boss reiterated that all AMCON can ever do with recovered money is to pay down its debt.
Fighting the Tyranny of Debtors
The problem of chronic debtors in the banking sector
has been a perennial concern for some years. One of the major challenges of the
local lending cycle in Nigeria is that lenders which are the banks have become
victims of the tyranny of bad and delinquent debtors.
Some of these bank debtors are high profile
individuals and people with political influence, therefore, worsening banks' ability to recover delinquent loans. CBN has adopted various policies to reduce
the incidence of bad loans in Nigeria. In 2015, CBN issued a directive titled
"Recovery of Delinquent Credit Facilities" to all Nigerian banks and discount
houses, to give delinquent debtors a three-month grace failure by these debtors
to make recompense within the grace period will lead to the names of these
debtors being published in three (3) national dailies which is expected to be
quarterly.
However, the question arises whether the "name and
shame" strategy and blacklisting of the defaulting creditors constitute the
right approaches to dealing with credit defaulters. These strategies may be
viewed as severe and beg the question how banks can avoid delinquent loans in
the first place.
The latest strategy adopted by CBN is the GSI (Global Standing Instruction) guidelines issued by banking sector regulator. The GSI contains notable provisions on the obligations of a borrower to execute a GSI mandate permitting a creditor bank to debit any of its bank accounts in Nigeria, in repayment of the loan facility availed the borrower. As previously noted, the GSI was prompted by the need to reduce the incidence of delinquent loans in the financial sector.
The New Approach
With
opportunities for better debtor profiling before loans are granted, a report
written by Proshare Nigeria but commissioned by Debtors
Africa earlier in the year noted that the domestic loan process can be
de-risked by improved borrower knowledge and monitoring. The Debtors Africa report noted that the use
of digital registers of borrower's activity across the financial service
sector provides a loan marker which enables new lenders insight into the
character of the borrower. The new approach would embed a customer's borrowing
journey into a digital framework that can be reviewed by lending institutions.
The digital register differs from a credit bureau; while a credit bureau
provides a scoring system to determine whether a borrower is a fit and proper
person to take a loan, the digital register is a dynamic record of strictly delinquent
and hardcore borrowers. The record looks at the amount outstanding, the
customer address and business, and details of directors if the customer is a
company. The register replaces the old perishable "name" and "shame" approach
tried by AMCON and Access Bank Plc. The "perishability" of hard copy print list
of delinquent customers makes its effectiveness limited. However, a digital
list of bank customers that are delinquent or unwilling to pay debts is more
permanent and overcomes the psychological impact of "saliency" and "recency".
Illustration 1: Lending Cycle
The online digital register is a quick recourse for base rate references on a prospective borrower's existing credit position. The lender can screen the borrower while also assessing the character of the corporation or individual concerning recent and past loans received. The register could serve as a pre-emptive tool at the point of loan appraisal, a digital monitor at the point of loan administration, and a loan recovery tool at the point of loan repayment.
Illustration 2: Debt recovery/Management
new indicative paradigm
Going Forward
AMCON must evolve and reset its internal and external
engagements to ensure better monitoring of loans outstanding and providing
clarity of context of the face values of delinquent loans outstanding, the
balance on the amount outstanding with respect to an early bird intervention
of N1.7trn into the banking system and the status of banking sector sinking
fund accumulation. AMCON may also need to resolve with the NDIC issues over
premiums collected by the depositor's protection agency on depositor funds that
were protected by AMCON at the point of banking system intervention in 2010.
AMCON needs to disabuse itself of the unusual notion
that taxpayers' funds could be used to write-off outstanding delinquent banking
sector loan assets. The notion of the use of public funds to resolve private
sector financial indebtedness contradicts all known concepts of efficient
financial markets. The fiscal treasury is not a reserve of last resort
for financial buccaneers. Markets must take care of their own mess.
Related Links - Download
PDFs
1. Operational
Guidelines on Global Standard Instruction (GSI) - CBN, Jul 15, 2020
2. Executive
Summary: NPLs & Bank Debtors - The Case for a New Industry Approach - May 14, 2020
3. (PDF) NPLs
& Bad Debtors: - The Case for a New Industry Approach - Debtors
Africa, May 13, 2020
4. AMCON and Financial Services Debt Burden in
Nigeria - Aug 17, 2018
5.
(PDF) - Coronanomics and the
Nigerian Economy - Jun 06, 2020
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