Concerns over banks’ NPLs, forex exposure

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The Central Bank of Nigeria (CBN)-led Monetary Policy Committee (MPC) has expressed worry over the concentration and  high non-performing loans (NPLs) in banks.

The committee decried the persistent risks in the financial system, especially the high foreign exchange (Forex) exposure of banks, particularly to entities that do not earn forex.

CBN Deputy Governor, Edward Lametek, a member of the MPC, disclosed this in a statement on the MPC meeting, posted on the CBN’s website. He reiterated that the concentration and high NPLs were also of concern to the apex bank.

He however, said  payment of contractor debts by the Federal Government would go a long way in reducing the pressures in banking, and that improved surveillance and deployment of sanctions against regulatory infractions would engender good governance and stability.

“This is important because financial intermediation, especially provision of credit, is highly dependent on the state of health of financial institutions. At end-February 2019, the stock of deposit money banks’ total credit declined by about 2.5 per cent, year-on-year. This trend needs to be halted in the face of the prevailing sluggish performance of economic activity. In this context, the role of other financial institutions (OFIs) in the credit arena becomes important,” he said.

He explained that these institutions (micro-finance banks, finance companies, mortgage banks, development finance institutions, among others) are expected to play the very important role of closing certain gaps in the financial system, including crucially, financial inclusion. As such, they need to be encouraged to remain mission-focused.

“Overall, the balance of risks continues to be tilted against economic growth. In my January 2019 statement, I emphasised the need to support growth given the weak outlook for economic activity based on indications from the oil sector (especially the volatility in crude prices and production cuts) and sluggish consumption demand. Of course, I noted that more clarity over the next two months (February and March) would be helpful in deciding the direction of monetary policy beyond third quarter of 2019,” he said.

“Clearly, the indications then have been justified by subsequent developments particularly as shown by the CIEA, PMIs, and the outlook for the oil sector. My conviction about the merit of easing the policy stance around this time has been further strengthened by the increased opportunity for doing so. First, all the measures of inflation continued to trend downwards in February with an outlook for achieving single-digit core inflation by August. This means that the real challenge remains food inflation, which may be more effectively addressed through actions aimed at boosting production and easing distribution bottlenecks,” he said.

Lametek explained the CBN’s interventions in agriculture would continue to be relevant; domestic yields had declined with the one year treasury bills rate at about 13 per cent; the monetary policy stance needed to be in sync, especially as inflow of portfolio investments remained high.

He added that the relatively good level of external reserves and growing confidence in the economy offer some guarantee of adequate supply of forex to the market from both the CBN and autonomous sources.

He said a growth-supporting monetary policy orientation can only complement policies in other sectors of the economy to deliver broad based economic prosperity. The structural impediments to growth and job creation, particularly poor infrastructure, low (public) revenue effort and insecurity have to be dealt with and also maintaining a focus on the diversification of the economy.


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