How Monetary Policy Should Cushion Bank's Non-Performing Loans (NPLs) -Marcel Okeke

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Monday, June 01, 2020 / 5:44 AM / Bukola Akinyele for WebTV / Header Image Credit: Ecographics

 

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The CEO of Mascot Consult Limited, Mr. Marcel Okeke speaking on the reduction of Monetary Policy rate from 13.5% to 12.5% by the Central Bank's Monetary Policy Committee Meeting insisted that monetary policy expansion would be welcomed. Okeke argued that a 100 basis point reduction in the Monetary Policy Rate (MPR) was a move in the right direction but the monetary authorities needed to go a few steps further.

 

Previewing issues likely to shape the economy in 2020 Okeke noted that the key activities that will shape Nigeria's financial services sector would be the quality of risk assets and business sustainability, he was of the view that many businesses would not survive COVID-19 pandemic, as business owners indebted to banks would not be in a position to service their loans. Okeke believed, that there would be a general increase in Non-Performing Loans (NPLs) as businesses fail on the back of falling consumption and consumer spending. Citizens, according to Okeke, would find it difficult to buy goods as salaries disappeared due to job layoffs. The former banker noted that if care was not taken a fall in risk asset quality could lead to a spate of fresh bank mergers and acquisitions in 2020.

 

Discussing the state of bank NPLs further, Okeke agreed that a new approach had to be adopted for effective loan governance, the regulatory other stakeholders needed to work in sync to prevent a contagion of delinquent credits. According to Okeke, there had been credit challenges in the banking system before Q1 2020, especially from sectors such as Oil & Gas and the Power sectors.  Okeke noted that earnings performance tailed off in Q1 2020 compared to the contemporary period of 2019.

 

 Giving further insight into the state of the banking sector, the CEO of Mascot Consult Limited, noted that the rate of increase in bank profit this year is marginal as a result of the growing impact of NPLs on bank's Profit and Loss Accounts. According to the financial consultant,  the price of oil and gas was too low such that sector operators may not go into new investments.  He emphasized handling NPLs wisely and ensuring that the  National Deposit Insurance Cooperation (NDIC) and the Central Bank of Nigeria (CBN) continue to play their role in ensuring that depositor's money is protected.


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Looking at delinquent debtors who need to manage debt over time, he was of the view that the reduction in MPR was indicative of the CBN trying to bring down lending rates and easing pressure on borrowers. However, he noted that declining oil revenues would create challenges for the fiscal authorities in meeting their overhead expenditures and this could lead to delayed or non-payment of salaries which would in turn reduce domestic consumer spending and increase business inventories and the rate of defaults on commercial loans.  

 

Okeke spoke on the foreign exchange management approach of the CBN, insisting that the regulator cannot indefinitely manage the exchange rate in a 'dirty float' hence making depreciation inevitable.  He further said that CBN had supported the economy through an import substitution industrialization strategy to stabilize the Naira meaning that anything that could be manufactured locally should receive total support which would reduce the pressure on forex and would improve the consumption of made in Nigeria products and save Nigerians from the contagion of a post-pandemic global economic recession.

 

According to Okeke, with the price of oil slumping,  the foreign exchange supply would fizzle from the petroleum sector, as the tension between the USA and China continues to put downward pressure on crude oil prices and domestic Nigeria fiscal revenues.


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