Against market expectation, the non-performing loans (NPL) in the banking industry has declined significantly since the Central Bank of Nigeria first announced an increase in the Loan to Deposit ratio (LDR) for deposit money banks in the country.
Earlier in July, 2019, CBN raised LDR for banks to a minimum of 60 percent in a bid to get banks to increase lending to the real sector. Banks were given until the end of September 2019 to comply with the new regulation.
At the time, industry LDR was estimated at 57 percent. As banks rushed to comply with the 60 percent minimum LDR regulation in September, CBN decided to raise the ratio further to 65 percent with a compliance deadline set at the end of December 2019.
Between June 2019 and September 2020, banks had grown their loan portfolio by about N4 trillion from N15.4 trillion in June 2019 to N19.4 trillion in September (Q3) 2020, representing a growth of 26 percent in just 15 months.
As loan portfolios grew, industry NPLs declined. Industry NPL was as high as 9.3 percent in H1 2019 to 6 percent in Q3 2020, a decline of 230 basis points according to data obtained from National Bureau of Statistics (NBS).
In absolute terms, Industry NPL declined by about N275.4 billion over the 15-month period.
Interestingly, Industry NPLs only grew by around 2 percent between Q1 and Q2 2020 despite the economy falling into its biggest economic recession in over 3 decades.
In Q3 2020, industry NPLs fell by about 3.5 percent as the pace of decline in the economy slowed.
This is all in contrast to how the industry NPLs fared during the last recession in 2016.
In Q2 2015, one year before the economy tumbled into its first recession in 25 years, Industry NPLs stood at N628 billion (NPL ratio of 5%) but as the economy deteriorated so also did bank loan performance as Industry NPLs grew to N1.7 trillion (NPL ratio of 12%).
As the country suffered its year long recession, NPLs continued to grow, eventually reaching N2.4 trillion (NPL ratio of 15 percent which was 3x higher than the CBN NPL threshold for banks) in Q3 2017.
It is unclear how banks have managed to keep their loan books performing exceptionally better than it did in 2016 but however they are able to better manage risk today, it must be to the excitement of their shareholders.