Non performing loans increase as oil producers struggle to pay debts

Non performing loans reported by banks have increased due to the falling oil price.The oil price plunge on the international markets has caused Nigerian banks to come face to face with the worst cash crunch in decades. This is mainly due to the fact that the banks’ biggest borrowers, which are oil producers are in serious financial straits. Most oil producers have been forced to declare force majeure on financing oil projects thus failing to pay their debts.Oil producers, make up more than 28 percent of commercial banks loan portfolios, so a failure to pay on their side means that there will be a sharp increase in the non performing loans.Ronke Jibodu, vice president at First City Monument Bank Plc said that in their projections, the worst target for oil was set at $35 a barrel but as of today it is $35 per barrel.

Nigerian bank executives are reported to be putting together a proposal to the Federal government for a bailout that will guarantee loan worth almost $25 billion extended to the petroleum industry. This comes amid fears over the liquidity of some Nigerian banks and said it expected 2016 to be tough for the lenders unless they shore up their capital.

“Sentiment towards Nigerian banks has gone from positive to outright fear,” the group said. “The fear is not without reason given the falling oil price, likely spike in bad debts, political uncertainty and Boko Haram insurgency.”

“It is indeed likely that there will be a lot of distress next year, but it is important to remember that what a company earns in a particular year generally has little bearing on the intrinsic value of the business; what counts is the level of normal earning through the cycle and the ability to grow those earnings,” it added.