THE list of those owing the infamous five banks reads like a Who's Who of Nigeria's well-heeled aristocracy. A group once considered untouchable, above the law, woke up one morning to find their names on the list. Their response? Denials and rejoinders via advertorials in the dailies and through text messages - They have a week to repay or face prosecution and asset seizure where legally possible.
Nevertheless, their rebuttal is rather rich. Splitting hairs over semantics can only go so far. But a caveat: Nigerians may, by the sleight of lexicon, be bamboozled into thinking the CBN acted rashly. What is a bad debt? Who is a defaulter? When can a loan be considered non-performing? What is the difference between interest payment and principal? Not to worry, glossaries of finance books help bring clarity to all these financial jargons. Essential Finance, by Nigel Gibson, is my favourite - a worthy companion for navigating the deep end of financial gobbledygook.
A bad debt is a loan not paid within a reasonable time and its due-by date. Why? Because the borrower is cash-strapped. Bankruptcy or cash flow problems are the cause of this. "Bad debts are an inevitable part of business;" fair enough, but "keeping them under control is an art." Provision for bad debts, from regular profits, should cover those loans that are expected to go sour. That gets tricky when there is mismatch in funding. Most of the loans (funds of unwary depositors) were concentrated in the oil and gas sector (fuel importation to be more precise) and the capital market. Both have since crashed.
According to Business Day "most of the facilities acquired by the oil marketing companies are usually on short term, maximum 90 days basis". Things tend to get awry because of this divergence. "Without provisions, all of a bad debt has to be taken out of the banks' profits in the year in which it occurs." O boy! No wonder the infamous five went skint. Greed and hubris led them to quantitatively engineer the books (cook the books if you like) rather than go cap in hand to CBN or other investors. Not by a hair's breadth - astronomical profits and the wealth illusion had to be maintained. Potemkin must be envious. In the words of J.P. Getty, American oil executive and financier, "If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem."
The borrower is said to be in default when a debt goes bad. It means failure to repay the loan, first the interest let alone repayment of the principal, "according to the terms of a contract". Most of the loans shelled out by the infamous five were to cronies or their fronts (called relationship lending in our clime), they had no security to back them. The name of the borrower would do.
The BBC in its analysis said "it appears that banks have been handing out loans to powerful and well connected customers prominent bankers, industrialists, state bodies, politicians and oil and gas magnates who may never have intended to repay the money." Classic case of debts gone bad from the word go. Richard Brinsley Sheridan, British dramatist and politician, aptly puns the situation "It was not their interest to pay the principal, nor their principle to pay the interest."
Legal moves to recover the money are no-go areas in Nigeria - it takes an average of; hold your breath, 457 days to enforce a contract! With no underlying security backing most of the loans, CBN had to grab onto something. Name and shame was the way to go. At that, with the injection of $2.6 billion, these debtors were effectively indebted to the CBN. But first, the CBN had to separate the wheat (performing loans) from the chaff (non-performing loans) of the infamous five - albeit with errors.
Some of the 200 deadbeat debtors cried foul. Their reputation was at stake. And their loan-shopping days were over. Impunity due to an "immunity clause" called anonymity (bank confidentiality in legalese) had ended. Mulish ones among them still insisted on disputing the amounts, charges and what constituted a non-performing loan.
Sanusi Lamido Sanusi, CBN governor, all the way in Kinshasa told The Punch on August 21, 2009 "the classification of a non-performing loan is for the regulator. It is a technical term and there are guidelines for classification." Non-performing loans (NPL for short) can be substandard, doubtful or lost... It is our duty to name defaulters and shame them." (Wetin the lawyers, bankers and media advisers of these big men dey do sef?!)
A longish, but worthwhile explanation from the Prudential Guidelines for licensed banks, issued by the CBN, exhaustively defines NPLs.
"Credit facilities (which include loans, advances, overdrafts, commercial papers, bankers acceptances, bills discounted, leases, guarantees and other loss contingencies connected with a bank's credit risks) should be classified as either "performing" or "non-performing" as defined below:
* A credit facility is deemed to be performing if payments of both principal and interest are up-to-date in accordance with agreed terms;
* A credit facility should be deemed as non-performing when any of the following conditions exist:
* Interest or principal is due and unpaid for 90 days or more;
* Interest payments equal to 90 days interest or more have been capitalised, rescheduled or rolled over into a new loan (except where facilities have been reclassified as "performing") That is, cash payment on the unpaid interest has been effected before 90 days elapse
The guideline (italicised for emphasis) however notes that, "the practice whereby some licensed banks merely renew, reschedule or roll-over non-performing credit facilities without taking into consideration the repayment capacity of the borrower is objectionable and unacceptable."
Essential Finance has a similar definition, suggesting that Nigeria is following best practices. It says a NPL is a "loan on which interest payments are considerably overdue. US banks are required to consider loans to be non-performing when no interest has been paid for 90 days or more. When they pass the 90-day threshold, such loans have to be reported as non-performing in the banks' accounts." So why the quibble? Face-saving measures maybe. But Dr Reuben Abati is bothered, rightly so. For him, the ordinary man - himself included I suppose - "is the biggest casualty in the on-going crisis". Wide patronage, feting, wining, dining and decorating were a recurring decimal in lives of these erstwhile bank chiefs. Numerable awards, from home and abroad, inspired the confidence of depositors. Two governors (Edo State and the former CBN helmsman) paid them accolades too.
Arguably the race for size: assets, deposits and branches, spurred a frenzied dash for huge returns on capital and ego (self-incensing as a friend calls it). In fairness to the award committees of these local and international awards, Dr Abati thinks "that they may have relied only on financial statements, doctored carefully and designed to impress both the international audience and the regulators, and this stealthily becomes the basis for assessment."
Yes O! Stealthily doctoring and designing statements is called window dressing in financial parlance. Through it, banks make their balance sheet and profit-and-loss statement look attractive. Thus auditors: internal, external and those at CBN are culpable. All missed this. (The former deputy governor for banking surveillance is supposedly a first class graduate of accounting from, um, the same university as the former governor).
"By sleight of hand and practised eye, accountants can enhance accounts by concealing and revealing, just as in a shop window." But here's the clincher "This can boost stockmarket turnover at certain times in the year." Sounds familiar? AP, Afribank, Union bank and Zenith bank in cahoots with stockbrokers and the NSE; a big bank rot made in Nigeria.
* Adigun is of the University of Ibadan.
