There is no gainsaying that presently, most companies have experienced a negative or highly negative impact on their businesses due to the coronavirus pandemic. Borrowers and lenders are in the same struggle to ensure their business continuity and financial liquidity. For traditional banking institutions, inability to avoid significant IFRS 9, stage 3 impairments could lead to systemic failures that could further worsen our economic landscape.
According to the Central Bank of Nigeria (CBN), the industry non-performing loan ratios had improved significantly for the year 2019. This was been attributed to improved recovery, more write-offs and more lending to the private sector by Banks. However, due to the pandemic and attendant negative effect on oil prices and overall operating environment, it is more likely that we would see stage 2 (past due but not impaired) loans which represent about 20% of gross loans move to stage 3 (impaired and non-performing) at the end of 2020.
In the last big recession/capital market collapse – 2008/2009, efficient and proactive internal loan remediation and credit risk management practices were sufficient to lessen the degree of impact for some banks and it will be the same in this COVID-19 era. For the rest, there was the need for CBN’s N500bn refinancing facility and Asset Management Corporation of Nigeria (AMCON). With the Country decidedly worse off financially than it was then, the current intervention thus far, has been about addressing regulations for easier loan recovery- the Global Standing Payment Instruction (GSI) and restructuring of loans to help borrowers cope with the current economic downturn. According to the CBN, N7.8 trillion naira ($20 billion) for 35,640 customers are already being reorganized out of 18.9 trillion naira in credit across the industry. The CBN governor will however, be more comfortable with 65% of total loans restructured i.e N12.3trillion naira.
Whilst this helps the overall asset quality and profitability of the Banks, the more critical question is whether this helps their liquidity. When loans are restructured and all repayments postponed where does the bank’s cashflow come from to settle its own repayment obligations as they fall due?
Typically, loan rearrangements/restructuring (tenor extensions, interest rate reductions, refinancing, modification of covenants etc) takes place pursuant to a detailed case by case analysis. The remediation officer works through the sources and sustainability of the borrower’s earnings, diligently and professionally forecasts cash available for operations and debt repayment, identifies new sources of cash for debt service, evaluates management competence and their effect on the company’s future creditworthiness as well as shareholder structure, support and influence where necessary. The rule is to avoid asset based lending and to assess overall nature of asset base adequately – is the firm worth more as a going concern or liquidated? In this COVID-19 era, such granularity will be sacrificed and asset-based restructuring perhaps supported by the utilization of strict monitoring covenants, reporting, board seats and management influence enforced directly or indirectly through third party agents is what the banks are enjoined by the CBN to do.
Despite the CBN’s direction for restructuring, some Banks will not survive by simply postponing. The market leaders with significant customer base will be separated from the followers. The market leaders with better capital adequacy ratios, enjoying float incomes, higher transaction fee income will have clearer head space to innovatively navigate these times. The resilient banks will also survive if they can find a way to expand beyond their current set of customers and products; something Ecobank Nigeria Plc seems to be doing with their Xpress Banking and Rapid Transfer Products. The Follower and Challenged Banks will suffer because of a lack of scale. They simply will not have the market base to survive this unfavourable market conditions. They will of course engage in costs cutting, aggressive marketing and task their collections teams to bring water from rocks and even raise the dead but mergers and sales are likely in their future post COVID-19. For the significantly pressured loan remediation officers, whilst there are no definitive workable prescriptions with loan remediation, they will do well to remember these two cardinal principles:
- Every loan is ‘figureoutable’: This is about mind-set. You will often need to play the role of both villain and priest simultaneously to get the desired result.
- Every loan recovery is a customized recovery: Loan recovery is only achieved were leverage can be applied and leverage is not holistically determined. It is determined as each case unfolds and is iterative. It may not exist at the start of a case but occurs in the middle of the case. Therefore a hawk eye dedication must be applied to every debt.
Finally, battling liquidity and keeping return on a tangible equity which has been steadily declining over the last 10 years according Mckinsey Banking Report 2019 is not an easy task. Banks at this time, must generally revise their debt management strategy and Risk plans. They must strengthen pre-delinquency monitoring of the debt portfolio and contingent liabilities, communicate proactively within the organization and be adaptive and responsive. They must build capable, efficient and resilient collections team and tackle bad debt with a diverse and differentiated approach; balancing rearrangements viz foreclosure and ensuring lenient terms where necessary, so as not to end up with a pool of unsellable assets and more haircuts.