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Non Performing Loans Hinders Dividend Payment

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Non Performing Loans – One of the issues facing the corporate world today is the problem of non performing loans, hence the reason commercial banks with bad loans has been Barred from paying dividend.

The order which came from the Central Bank of  Nigeria was firm and straight forward, the Nigerian apex bank stopped dividend payments to shareholders, especially those in the banking sector, discount houses as well as finance houses that has huge bad loans and also bad capital base.

Most times when central banks issues these type of order, it usually comes from the fact that there is a rise in non performing loans, a situation that has to curtailed save the capital base of these banks as well as other finance houses like the discount houses.

This order was issued only seven (7) days before the 2017 annual reports is announced by banks and discount houses. The issue now is that most shareholders will most be affected since dividends due them will not be paid.

It is believed in some quarters that this order was to stream down the increasing non performing loans in the financial system and on the long run cause erosion on the capital base of the affected commercial banks.

The order was issued in a written letter dated January 31st 2018, and was signed by the Director, Department Of Bank Supervision. The director stated that most of the commercial banks would rather to retain earnings for reinvestment, would instead pay dividend from the huge part of their profit, despite the fact that their risk profile is high.

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This has led the Central Bank to bar the Deposit money banks as well as discount house with huge non performing loans that are above 10% from paying out dividends from large proportion of their profits to their shareholders. This indicates that the minimum non performing loan threshold is 5% for commercial banks, bad loans are not meant to exceed 5% in bank’s loan books.

Commercial banking industry as of last year had recorded a nonperforming loan (NPLs) of 15.18%. The Deposit Insurance corporation had in 2016 reported that the non- performing loans (NPLs) has risen to 50%.

As well as not meeting up with the non performing loans (NPLs) standards, commercial banks that are yet to meet up with the regulatory capital adequacy ratios are also not permitted to pay dividends to shareholders.

Minimum Capital Adequacy ratios (CARs) according to the central banks has different categories, the first is for those commercial banks in the country with 16% while those with international banking licence has 15% and the rest of the finance houses 10%.

The Central Bank statement on the issue reads as following, in paraphrase “Globally, financial system has seen retain earning as an important method which could be adapted to in order to grow an institution capital base. Retained earnings is a source of long term finance, as it is cheaper as well as an easier way of raising fun internally, an advantage of this is that it reduces financial risk as well as improves liquidity and also profitability”.

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“It has however, been a thing of regrets as most financial institution rather than take advantage of this easy method of raising capital, they instead pay dividend with large portion of their profit, even with a high risk profile”.

The statement further reads in paraphrase that “In order to encourage a more sufficient adequate capital ratio, thesedirective will be applied against defaulting banks and discount houses”.

Requirements For Deposit Money banks and Discount Houses

  • Banks and discount houses that fails to meet up with the required minimum capital adequacy ratio will henceforth not pay out dividend to its shareholders.
  • Also Deposit Money banks and Discount Houses that has its Risk Rating as High or non – performing loans which is above 10% is mot also permitted to pay out dividend.
  • Deposit Money banks and Discount Houses who has the required capital adequacy ratio but a little above average of CRR or has a non – performing loans ratio of at least 5% but less than 10% can pay out dividend of not more than 30%.
  • Deposit Money banks and Discount Houses that meet up with the minimum capital adequacy ratio of above 3% the CRR and non – performing loans ratio (NPLs) of above 5% but below 10% can pay dividend of not more that 75% profit after tax (PAT).
  • Deposit Money banks and Discount Houses will no longer have restriction on dividend payout once they meet their capital adequacy ratio and also have a low or moderate CRR and also a non – performing loan of not more than 5%.
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Note – Boards of institution in this category are expected to recommend payment of dividend based on the effective risk assessment or perhaps the economic realities.

  • Deposit Money banks and Discount Houses are not permitted to pay out dividend of reserves.
  • Banks are required to submit their approved dividend pay-out policy to Central Bank before going ahead for any payment is permitted.
  • Ratios will be based on the financial year averages.

These requirement as stated is applicable to all the Deposit Money banks and Discount Houses as the list applies.

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Filed Under: Finance Tagged With: capital adequacy ratios, central bank, non – performing loans, NPLs

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