Kill delinquency before it kills the bank
President Buhari is reputed to have said that Nigeria must kill corruption before it kills Nigeria. There are many other areas of our national life that need a similar declaration. Microfinance banks and indeed all banks in Nigeria need to make a similar declaration on their Non-performing Loans (NPLs), if they are to survive the years ahead.The force of that statement conveys the urgency with which, in the president’s thought, corruption ought to be tackled, if the country wishes to reverse its many misfortunes. Microfinance banks in particular, need to make a similar declaration on their Non-performing Loans, which have hit epidemic proportions.
Nigeria has actually been fighting corruption for a long time at best mixed results but at worst without much to show for her efforts. One of the challenges is our inability to clearly define what constitutes corruption. And until we do that, we will continue to focus on financial corruption while worse forms of corruption, including nepotism, a crime against which there appears to be no law, and widely and openly practised by high government officials continues to boom.
In a similar vein, operators in the MFB sector must admit that the situation is dire and need to be tackled, but certainly with more transparent andconsistent methods.All hand should be on deck to tackle the scourge of loan delinquency among our banks and even the non-deposit money bank financial intermediaries, especially themicrofinance and mortgage institutions.
Recent reports indicate a worsening of the industry-wide delinquency data. From a best practice threshold of a maximum of 5 per cent, we have lost control of bad loans in our banking system. Our industry average delinquency ratio is now about 20 per cent. This is unthinkable in other climes but as always, things take different forms when it comes to Nigeria. Some banks are well above 20 per cent. If this could happen in the deposit money banks, with all the so called controls in place, then the situation in the microfinance and mortgage banks can only be imagined. It is therefore time to declare an emergency on bad loans in the financial system.
Effective performance management in a microfinance bank, and indeed all lending institutions, requires a good understanding of how the many operational elements contribute to financial performance. We have said elsewhere that a financial institution, including MFBs must first have a clear understanding of the market it faces and the demand it has to meet. This understanding is important for the development and pricing of its products.
Central to effective performance management is a strong management information system. A large number of our MFBs are not properly equipped in the technology areas. They run manual operations and do not have the capacity to deliver online real time services. In this day and age, when fraud has gone digital, it is difficult to imagine how some operators have managed to cling to life without appropriate technology. Regulators need to set or enforce minimum technology standards to help operators deliver on their mandate. This might involve decisions bothering on the type and requisite capitalization for different classes of operators.
The fact is that loan delinquency in the system has become very bad and can no longer be allowed to be swept under the carpet. Regulators must get more practical on the subject. As for the operators, it must be understood that appropriate reporting in accordance with laid down procedures is in the interest of the institution, its staff and shareholders. Masking information or under-reporting, especially of delinquent loans is against the interest of all stakeholders but more particularly the interest of investors.
Loan delinquency affects profitability and, by extension, the overall health of the institution. Firstly, earnings are directly impacted when interest is not received on delinquent loans. However, the bigger problem arises when heavy loan loss provisions become inevitable as principal sums fail to be repaid. The fact is that loan losses put severe pressure on existing loans to generate additional income to cover the financial hole created in the capital base by lost loans. The truth is that once a loan is lost, the operator must expense the full amount of the principal and interest. This puts pressure on performing loans to earn more, and affects the amount of available equity.
Loan losses have the effect of reducing the capital available for trading. In the circumstances of the many unit MFBs with capital in the range of N20m, this further narrows the room for the operator to manoeuvre. The result is that shareholders may need to bring more money if the operations of the institution are to be continued. Of course we know the attitude of many investors to calls for additional capital. Many will take all kinds of deceptive accounting measures to show that they have brought in fresh funds. Some may recycle funds and move assets around to confuse regulators. At the end of the day, the operator is left in its new weakened position caused by loan delinquency and poor loan management.
A properly managed MFBs must be in a position to determine the full cost of replacing a lost loan principal. This involves clearly estimating the costs associated with booking, disbursing and managing the loan. Operators must be able to accurately compute the annual contribution margins on their loans. The market can always offer a software that gives the output at the click of a button but operators must invest in it. They have to invest more in technology. To do things manually is inefficient and akin to flying blind. This is why it has become imperative for MFBs of all classes to implement a certain critical level of technology on an on-going basis.
Emeka Osuji