Recently, there was a report of AMCON taking over the Silver Bird Cinema in Abuja, Port-Harcourt and Lagos. I was not surprised and I am surprised that some people are surprised. This is expected coming from my understanding of the credit system in Nigeria. I study the financial statements of many banks in Nigeria on annual and quarterly basis and I come to the conclusion that we have weak credit system. The exposure of banks to individuals and sectors are poorly managed by the Central Bank of Nigeria. When I was interviewed by Central Bank to join its credit team, I was happy and I had a list of what I intend to change (through sound proposal to the management)…anyway, I did not get the job because my father is not politically important person.
Let us start with definition of Risk & Risk Management. These definitions are mine and not culled from any journal, literature or published or unpublished paper.
Risk is any event, circumstance, act, activity, phenomenon, individual or decision that has the potential to alter a set goal. For instance if you intend to travel from Lagos to Ibadan for two hours, the potential risks that can alter your goals include traffic jam, civil unrest, accident, armed robbery, lack of fuel, vehicular faults etc. These are risks. Risks are either inherent or residual. Inherent risks exist before controls are applied and residual risks exist after controls are applied.
Risk management are the activities or measures designed to reduce or eliminate the risk. It is aptly difficult to eliminate risk. You can manage risks by avoiding the risk, accept and manage, share the risk with another party or totally transfer the risk to another entity.
Risk are either financial or non-financial. I want to talk about financial risks here. Financial risk includes market risk, operational risk, credit risk, liquidity risk, settlement risk, investment risk and valuation risk.
Credit risk is the risk that money or asset given to someone (as loan or placement) may not be recoverable. Bad loan is a loan that has low probability of being repaid by the borrower. The borrower and the lender contribute to failure to repay loans.
Bad loans in Nigeria is a major problem. Impairment charges of banks for FY2015 was over N450bn. There is higher probability that more provisions will be made because of sectorial exposures. Exposure to Oil & gas sector was about N2.5trn and Manufacturing was N1.7trn. As a result of this exposures, more loans will go bad. Oil & gas sector is not expected to recover soon and manufacturing sector is not expected to perform excellently owing to downturn in the economy.
Now, why do we have bad loans in Nigeria?
1. Weak obligor limit
Obligor limit is the extent of loan a bank can grant an entity (corporate or otherwise). The current rate is 20% of shareholders’ fund. This was set prior to consolidation when the shareholders’ fund was N2bn. When shareholders’ fund increased, the obligor limit should reduce considerably because of the weighing risk. Unfortunately, CBN slept off over this. Despite banking inspection and monitoring and Capital Adequacy Ratio, this loophole is left open for banks to play to the gallery. As at FY2015 end, the bank with least shareholders’ fund had over N70bn. Also, the CBN is expected to band-up the obligor’s limit. For systemically important banks (SIBs), the obligor limit should be lesser. The SIBs took over 75% of the bad loan and this may cause systemic crisis if it lingers on! As a matter of urgency, the obligor limit should be reviewed.
2. Poor credit approval process
Credit approval process in Nigeria is a funny stuff. Create initiation, to approval and disbursement appears weak. In some banks, the marketer initiates credit, the risk management carry out review, credit admin disburses (after approval). Credit appraisals by marketers are weak and vested interest makes banks give some credits that eventually go bad. How do you come to terms with an approval process that comes with an order of the chairman? Even the Chief Risk Officer cannot say “No” with glaring high probability of default, loss given default and exposure at default. It is simple difficult for the risk manager to decline some credits that come with instruction of “must grant”. There are lots to say here.
3. Weak risk management
Whenever I read the risk management portion of audited financial statements, I cannot help but laugh at the beautiful write ups. No bank will come forward to tell you that they have high operational risk, high credit risk or high market risk. I have never seen that conclusion before. Instead, we have highly technical computations which the regulators do not even understand. Risk assessment of banks should be independently done by an appointed consultant. The consultant should be licensed by CBN and same consultant should tell investor or shareholders about the Risk outlook of the bank. If a bank has potential credit risk, the Risk Expert should be able to make such independent opinion on the pages of the audited financial statement. Most risk management frameworks are just on paper and not in the act!
4. Poor collateral appraisal
What happens to collateral when loans go bad? Most collateral being presented are either not adequate or poorly profiled. Collateral value should have a premium above the loan value, but that is not always the case. You have a situation where the collateral amount is over-valued and the bank accepts it. Collateral should be reviewed for its liquid nature, future value, deterioration probability, encumbrance, legal title and such matrix that can give comfort about validity, precision and legal form of the collateral.
5. Poor loan monitoring
Once loans are given in Nigeria, the bank goes to sleep and wakes up when the loan is due for payment of when there is a need to take remedial action. That is bad credit monitoring system. Haven profiled the risk of the borrower at the beginning of the transaction, ensure that you keep a closer look at the activities of the borrower post disbursement. Ensure that the fund are properly applied. Also, monitor the cash flow system to ensure that repayment will not be a problem. Apart from being a lender, a bank is also an adviser to the borrower. It is important that banks advise the borrower on how better they can perform to avoid risk and make better returns. For instance, if you give out loan to an estate developer who has off-takers…ensure that the off-takers remain intact, and also a project going as planned (in terms of time plan and resources). Where there are sharp departures from the plan, it is an early sign that the loan may go bad. Or even thing of a situation where the borrower suddenly start living a lavish life style, then you know that your money has gone into the hands of a club guy (perhaps he is not repaying).
6. Poor Credit Strategy
Credit strategy includes review of entire credit risk and administration system and process. Conduct what I will call “Credit Planning for the subsequent year”. Review your global limit for the current, carry out sectorial analysis to know which sector you should focus on for the new year; set global limits for each sector and sector product limit for each line under the sector. This strategy can be reviewed quarterly in line with economic reality. Credit Strategy includes review of products for various markets and redesign of the collateral system. For instance, haven done your review for the current year and set strategy for next year, you can plan for downside risk in terms of what may possibly go run. Include these in your risk plan for the subsequent year. That makes you take an informed decision on the maximum Non-Performing Loan that can stay in your books and extent of exposures to individuals and sectors. The board risk management committee is expected to carry out oversight function over this. Risk Management is futuristic (though with historical dimension); as such risk plan should be summarised inside the audited financial statement. This is required to let a potential investor know what’s up with the bank.
7. Weak Regulatory Standards
The regulators in Nigeria act more like police than business amplifiers or supporters. This weakens the system. There is a disconnect between the operators and regulators. Regulators like to act as the boss and operators act as mafia who always play the right card. But recently, I begin to sense that regulators have become puppets for operators. The operators now influence the regulatory environment relative to the policies and frameworks that should be established and enforced.
Regulators should be mandated to review the obligor limits of banks from time to time; assess the liquidity in banking sector as a whole; look at global exposures to industries and monitor directors’ activities.