The new National President of Risk Management Association of Nigeria and Chief Risk Officer of Coronation Merchant Bank, Magnus Nnoka, has over 20 years experience in the banking sector, cutting across core areas of treasury and branch management/operations. He spoke to journalists on the need for risk managers to stay ahead of trends to identify new risks and opportunities in the banking sector. HELEN OJI was there.
What is your take on the rising NPLs?
It appears too hasty to make this conclusion at this point in the year. However, we saw that the NPL ratio in the banking industry was on the upward trend for most part of last year-2018, even on the back of timid growth in the aggregate lending portfolio to the private sector. The question however is around what we should expect to see this year around NPL.
My view is that we would likely see lower NPL ratio based on some expectations around some macroeconomic indices. But before we guess into the future, let us take a step back. Part of the reasons for huge NPL in the past few years could be traced to the challenges witnessed in two major sectors namely construction industry and energy sector and more specifically the downstream oil and gas sector and the impact of that loan portfolio in the books of banks.
However some reprieve was seen when substantial stock of this portfolio was settled by the government via issuance of promissory note late last year, so banks with impaired loans in these sectors in their books began this year with lower figure of NPL.
Another favorable factor is optimism on further recovery of the economy. Although the national election has taken centre stage since the beginning of the year, I have the believe that in the absence of any hiccups that may arise in the electoral process, the outcome will provide direction and some measure of predictability for investment decisions; therefore the second part of the year would witness high tempo of economic activities including increased demand for credit facilities by the businesses and consumers.
Banks will certainly respond positively to the demand in order to post profit given my projection that it would become more attractive than fixed income trading. On overall, I expect lower NPL volume in the banking industry this year.
Now that CBN plans to introduce stiffer measures for banks, what would you tell risk managers?
First, I do not see the measures that CBN are introducing as stiffer ones, rather they are more or responses to emerging risks in the business environment. Let us not forget that globally, the banking industry is probably the most regulated economic sector.
The risk management environment is very dynamic. The products and services as well as the channels the banks are deploying today to reach their customers have witnessed very significant transformation in Nigeria in the last one decade; these changes obviously introduce new risks which must be effectively managed hence the intervention of CBN through various regulations and policies. Risk managers at the banks have a responsibility to complement the efforts of the CBN in minimizing impact of the various emerging risks. Thus, from strategic viewpoint, whilst the CBN is focusing on minimizing the impact of systemic risk issues that could adversely impact the economy, Risk managers in their respective institutions are expected within the risk universe to take similar measures to optimize alternatives in order to increase value of the institution.
Which areas should risk managers focus on to forestall bank’s failure?
Bank’s failure can be precipitated from two principal sources – from outside, this reflects a bank’s failure or inability to respond effectively to a contagion effect of macro-economic challenges or financial meltdown. We witnessed this across the globe during the 2008-2009 financial crisis.
The second source is from within, and this often emanate from issues around poor decision making which could be borne out of capacity deficiency across board, lack of best practice risk management, absence of corporate governance and inordinate ambition to out-compete, amongst others.
Now, not withstanding the source, banks must first see their role as going beyond financial intermediation; once this is done the two key areas risk managers should focus on to forestall bank failure are enthroning strong corporate governance and enabling appropriate risk culture.
Corporate governance defines a bank’s resolve to protect the interest of all stakeholders, as hard as this may seem, the process ensures that the institution is standing on structures that can withstand different conditions including down times.
Related to corporate governance is the bank’s risk culture. Just as culture defines an ethnic group, a bank’s risk culture ensures all stakeholders are clear on the values, norms and artifacts that drive the institution.
Sadly, some big corporates not just banks in Nigeria today cannot clearly say what artifacts represent their risk culture. In this sense, I am not speaking of existence of well packaged and documented frameworks that no one has bothered to read, rather, I am talking of the day to day reality that is expressed in decision making process, risk appetite, risk interpretation, authority, consequence management etc.
Show me a bank that pay lip service to corporate governance and risk culture, and I will point to you a bank that is on a road to failure.
What challenges do risk managers face in the line of duty and what is the way forward?
The challenges risk managers face on their duties significantly derive from the way key stakeholders, namely the board and executive management see the role of risk management in the organization.
I joined risk management role over two decades ago when it was seen as where you keep staff you want to ‘punish’ for any reason. Although this perception has significantly changed, however some institutions still see the role as purely a control function and in extreme cases business stoppers.
Where this judgment exits, it makes the job of a risk manager more challenging than where they are seen as strategic partners or where strong risk management practices exist.
Overall, most risk managers contend with the challenge of being ahead of the business team in proactively identifying emerging risk issues and convincing decision makers to see the flip side of their actions, thus creating that risk-return balance in decision and achieving buy-in of relevant stakeholders who have other valid dominating drives could be a tough task for any risk manager.
My approach and advice is for risk managers to work from the point of demonstrating the benefits of risk management, and the easiest way to do this is to buttress these with facts and figures.
Almost all benefits of effective risk management today can be quantified either from internal or external experience; in this way challenges on the job can be better managed.
What is your outlook for the banking sector?
The business environment in Nigeria in the first six months would be dominated by political activities with its inherent apprehensions, uncertainty and short-term mind set in business considerations. Thus, the banking sector will face two halves of the year with different operating business environments. The first half would be marked by cautious business decisions; safety of investment will be the primary consideration. We have seen this in the portfolio of most banks, which proportionately skewed towards risk free fixed income instruments.
The second half of the year is expected to witness increased risk-taking activities by banks. This period would also see policy shifts no matter the political party that is in government and this would bear on key macroeconomic parameters that would present new risks and opportunities to the banking sector.
What challenges and solutions do you envisage in this election year?
Nigeria has always gone through national elections, and it has always been preceded by tensions of all sorts; however more remarkably given the structure of our economy where heavy reliance is placed on capital inflows and portfolio investors, we have seen that these inflows are being delayed until the conclusion of the elections. Businesses are also facing increased risk due to insecurity in some locations and inability to reach timely decisions particularly with public sector counter parties. I am not sure silo-approach can effectively tackle these challenges; rather most institutions are expected to take specific risk response that addresses specific challenges.
Lending in the sector is poor, how can this be enhanced?
Lending by the banking sector should be seen from two perspectives. Most times people tend to see the lending activities of banks from what goes to the private sector only, and recently this has led to a perception of that not doing enough lending. However, when we consider the huge funding the public sector has raised in the last few years, the narration should change. The argument rather in some circles is the negative impact of huge public sector borrowing in terms of crowding out the private sector.
Having said this, we should appreciate that banks are set up to facilitate financial intermediation hence they need to lend in order to make returns to investors. I think the challenge most banks face in lending is signing on quality credit or borrower’s ability in meeting the risk acceptance criteria for accessing loans.
This is not also to rule out the challenges borrowers face in meeting certain lending conditions and of course relative cost of financing which can still be considered high particularly when you look at some economic sectors
I therefore think that some of the measures to enhance lending will require improving quality of obligors.
Among issues to be addressed are encouraging strong corporate governance, transparent financial reporting on the part of borrowers as well as strengthening regulatory and judicial system for loan disputes settlement.
A culture of credit discipline, information asymmetry and self-disclosure are critical elements of any environment that seek to enhance credit creation activities.