MPC: Loan write-offs raise financial soundness indicators

Major financial soundness indicators (FSIs) have improved in April 2019 due mainly to loan recoveries, disposals and write-offs, a member of the Monetary Policy Committee (MPC) and Central Bank of Nigeria (CBN) Deputy Governor, Edward Lametek has said.

In his personal statement on the last MPC meeting released yesterday by the apex bank, Lametek said  the industry capital adequacy ratio (CAR) increased marginally to 15.60 per cent in April from 15.14 per cent in February, while Non-Performing Loans (NPLs) decreased to 10.95 per cent from 11.28 per cent.

He said the NPLs ratio is still higher than the prudential limit of five per cent. “Other vulnerabilities in the industry include high concentration and contagion risks as well as significant FX exposure. These conditions have tended to increase averseness to risk in the industry leading to some form of asset substitution. It is especially concerning that credit to the private sector is declining and this needs to be halted and possibly reversed to strengthen economic activity and job creation,” he said.

“In arriving at a decision at the May MPC meeting, I reckoned that the effects of the downward adjustment of the MPR in March had not fully manifested and that downside risks to growth were quite strong. Although, interbank rates slightly eased in response to the adjustment in the policy rate, retail rates remained sticky downwards. More importantly, credit to the real economy declined. In my statements following the immediate past two MPC meetings, I underscored the need to support growth given the weak outlook for economic activity based on indications from the oil sector, external vulnerabilities and sluggish consumption demand. I am persuaded to sound a similar tone in this statement given that the outlook for growth and employment continues to be hazy and largely uncertain in view of multiple risks at home and abroad,” he said.

“Much as openness offers numerous benefits, it certainly increases exposure to external risks and vulnerabilities, which economic policy must continuously take onboard. I perceive, at the moment, that the external threats to medium-term economic stability of Nigeria are quite strong, meriting a coordinated policy shield in the form of building buffers (fiscal and monetary) and clear signals to the markets,” he added.

Another MPC Member, Festus Adenikinju,  said the financial system indicators (FSI) since the last MPR meeting continue to trend in the right direction.

“The NPLs ratio is trending downward but is still significantly above prudential benchmark, requiring more actions by the Central Bank and by the DMBs. The preference shown by the DMBs for fixed income government assets over credit to the real sector of the economy is worrisome. Credit to real sector is not only low but decreasing in relative terms in asset portfolio of DMBs, and is concentrated on low employment generating sectors. Banks seems to have abandoned their primary role of intermediation. This unhealthy trend should be strongly discouraged. Banks continue to focus on easy ways of making money, including through its various charges on customers and government securities, at a time when the economy is in dire needs of banks’ credit,” he said.