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Banks Pass CBN Stress Test Setting Stage for Pullback in Forbearance

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A recent stress test conducted by the Central Bank of Nigeria (CBN) on banks in view of restructured industry credit portfolios as a result of the coronavirus lockdowns showed that banks could still comfortably meet capital requirements, setting the scene for a gradual pullback in forbearance.

“Stress test results in this respect also showed that industry solvency and liquidity positions were at comfortable levels and could withstand mild to moderate shocks in the short to medium term,” Ahmad Aishah, Deputy Governor, Financial Systems Stability Directorate at the CBN, said.

Whilst happy with the positive performance of the financial system, Ahmad noted that the CBN must remain vigilant to identify and proactively manage possible downside risks to financial stability arising from credit default risk.

Nigeria’s banking industry ratios have remained resilient despite the covid-19 crises, posting strong soundness indicators.

The capital adequacy ratio stood at 15.8 percent as at April 2021, some 90 basis points above the ratio recorded in April 2020, according to the latest CBN data, while the liquidity ratio stayed healthy at 38.9 per cent as at end- April 2021, above the 30 per cent minimum liquidity ratio even as credit to the real sector continued to grow.

The CBN also built significant liquidity buffers in Cash Reserve Ratio (CRR) balances to provide liquidity backstops as and when required to the banks, Ahmad said.

Nigerian banks have grown loans amid the pandemic that led to a recession in 2020, a counter-cyclical move that is raising fears over possible erosion in the quality of their asset books.

Banks total assets increased by N6.97 trillion to N53.17 trillion in the one-year period between April 2020 and April 2021, driven mainly by increase in credit.

The gross banking sector credit meanwhile increased by N0.85 trillion from N22.68 trillion at the end of December 2020 to N23.53 trillion at the end of March 2021. The credit growth was largely recorded in manufacturing, consumer credit, general commerce, information and communication and agriculture.

The CBN in 2019 increased the minimum loan-to-deposit ratio (LDR) of commercial banks to 65 percent, a measure that was among a range of regulations aimed at forcing banks to boost credit, mainly to farmers, small-and-medium-size businesses and consumers.

As the pandemic hit last year the CBN nudged the banks into providing forbearance to debtors unable to meet loan repayment obligations as a result of the COVID-19 lockdowns imposed by the Federal Government.

Forbearance is a temporary postponement of loan payments, and lenders and other creditors grant forbearance as an alternative to leaving the borrower to default on the loan.

Some central bankers are however arguing that it’s time for the forbearance to begin to be wound up.

“There is a need for timely and orderly withdrawal of forbearance on loan restructuring granted to the banking sector. The growth in aggregate credit indicates that the CBN policy on Loan-to-Deposit Ratio (LDR) is working,” said Adenikinju Adeola Festus, an economist and member of the CBN Monetary Policy Committee (MPC).

The banking sector’s non-performing loan (NPL) ratio fell from 6.3 percent in February to 6 percent in March and further to 5.9percent in April.

However, the non-performing loans ratios do not provide a full picture of the quality and risk level of the overall loan portfolio as the moratorium on COVID-19 restructured payments prevents debtors from defaulting on their debts to banks, according to Asogwa Chikwendu, another member of the CBN’s monetary policy committee.

Data from the CBN show that vulnerable borrowers benefiting from the CBN COVID-19 forbearance hold about 37.72 percent of the entire banking industry loan portfolio.

“This surely represents a significant size for the banking industry,” Chikwendu said.

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