Bank directors may not be able to access loans from banks anymore

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Bank directors have been enjoying loans from banks they preside over and could take those loans anyhow they want. That is about to change…

The recommendation by the Nigeria Deposit Insurance Corporation (NDIC) that directors of licensed deposit money banks and other financial institutions be barred from accessing loans from institutions they sit on as directors has been welcomed by analysts and stakeholders in the industry. The NDIC is also seeking to bar bank directors from sitting on the boards of any financial institution if their loans become classified as non-performing.

Following high level of insider related dealings, which gulped a whopping N740 billion or 40 percent loans of deposit money banks as of December 2016, NDIC has sent a proposal to the Central Bank of Nigeria (CBN) to prohibit directors of these banks including microfinance banks (MFBs) and primary mortgage banks (PMBs) from obtaining credit facilities from their respective banks.

“It is indeed a welcome development. A lot of studies on bank failures have shown that loans to bank Directors played a significant role. So, the measure will not only check insider related dealings (including sharp forex practices by Bank Directors), it will also go a long way in reducing the high prevalence of non-performing loans (well above the regulatory threshold of 5 percent) in the banking industry”, Uche Uwaleke, Associate Professor and Head, Banking and Finance department Nasarawa State University, said in an emailed response.

Ayodeji Ebo, managing director, Afrinvest Securities limited, is of the opinion that bank directors’ should not be totally barred from taking loans from their banks but a review of the credit policy on related party loans.

Ebo said the CBN needs to come up with more stringent rules around the maximum loan limit directors can access, maximum tenor as well as minimum interest rate allowable. The amount of loan should be capped as a proportion of their remuneration. The policy should also include related companies of the directors. Also, loan documentation should be more stringent (like higher coverage ratio) to reduce the delinquency level.

“This will reduce loan losses, hence bolster the bottom lines of the banks”, Ebo said in an emailed response to BusinessDay.

This infraction by bank directors has resulted in rising Non-Performing Loans (NPL) put at a record high of N1.85 trillion, about 10 percent above 5 percent industry regulatory threshold.

Umaru Ibrahim, managing director/CEO, NDIC, had expressed displeasure over the rising trend in the level of banks’ non-performing loans (NPLs) in these financial institutions.

According to the Corporation, the 25 Deposit Money Banks (DMBs) had total loans portfolio of N18.53 trillion as at December 2016.

In microfinance banks, (MFBs), insiders/ directors consumed N68.25 billion or 35 percent loans while NPL remained as high as N87.75 billion or 45 percent. The NPLs indicated a classic case of over-lending, accumulated interests charges and poor corporate governance.

Similarly, the existing 42 primary mortgage banks (PMBs) had total deposits liabilities of N69 billion but with total loans portfolio of N94 billion, which indicated another case of over-lending, accumulated interests, poor corporate governance and high ratio of NPLs which stood at N51.7 billion or 55 percent out of which N42.3 billion or 45 percent were Insider related/Directors loans.

The resultant effects of these negative trends would be poor earnings and erosion of shareholders fund, Ibrahim, had said in his 2017 budget defence before House Committee on Insurance and Actuarial Matters.

Nigeria Today

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