Commercial banks and their customers are at war. It is over 150 per cent coverage introduced by the banks for Letters of Credit (LC) applicants seeking dollars for raw materials import. The coverage is to insulate the banks against dollar scarcity and naira volatility. The banks want the coverage on all LC transactions, but customers see the move as arbitrary and painful, writes COLLINS NWEZE.
For importers and manufacturers, whose businesses depend on dollar availability to thrive, this is not the best of times. With the continued dollar scarcity and unending naira volatility against world currencies, banks are introducing new transaction terms for customers applying for open Letters of Credit (LCs) to import raw materials.
Manufacturers and importers, who have been groaning under rising interest rate as high as 30 per cent per annum and high transactions fees, would have the 150 per cent being introduced on all LC transactions to contend.
The 150 per cent cover was introduced last year when the naira outlook became uncertain and the banks decided to build the transaction risks around their customers. The Banks are
The introduction is taking its toll on manufacturers. A Lagos-based newspaper printing company narrated its experience with its lenders when it opened LCs to enable it secure dollars to import raw materials.
“I must confess to you that our experience has not been palatable at all over the past two years. Last year, after so many struggles, we were able to establish some LCs to bring in some of our raw materials. Subsequently, it has not been the same thing, because our attempt to get forex through more LCs after the March episode had not been possible,” an official of the newspaper’s told The Nation on condition of anonymity.
The official explained that the company had approved Form ‘M’ with GT Bank for $70,000 to import printing ink from Europe. But the bank kept the naira equivalent for nine months without providing the dollar needed for the transaction.
Failed transaction
It said: “Our naira was with the bank, and was not yielding any interest for us. We could not touch the naira. By last December, we decided to withdraw the money after the transaction failed. The one we did in 2016 was through Sterling Bank, which was successful. It took us time to source the dollar, but it was eventually done at the rate of less than N200 to dollar in March last year.”
Explaining the difficulties manufacturers had in sourcing dollar for imports, the introduction of flexible foreign exchange policy by the Central Bank of Nigeria (CBN) compounded the situation.
With that policy in place, importers and manufacturers were sourcing dollars at the parallel market rates.
The source went on: “But for a newspaper house, we cannot buy dollars at the parallel market rate because even when we buy at the official rate, the cost of producing a copy of any newspaper is higher than the cover price even when you get the dollar at the official rate, let alone when the dollar came from the parallel market. So, we deliberately refused to source for dollars from the parallel market. We relied on the banks,” he said.
The firm’s worst experience came when it opened a $1.8 million (about N600 million) worth of LC with Zenith Bank.
It said: “The raw materials we needed were newsprint, ink, and Chemistry, among others and were meant to last us for six months. But, we had only N420 million instead of N600 million and we advised the bank to do an LC worth N400 million and subsequently reduced our order for raw materials.
At the mercy of banks
“But when they converted the N400 million to dollars, it was of about $1.2 million at the rate of N320 even when the official rate was between N305 and N310 because we wanted the interbank bidding to be successful. Everything came to about N420 million, but the bank said we can only deal if we deposit 150 per cent of the $1.2 million in naira value.
“The bank had already overstated even the rate, to avoid any fluctuation. That means that we were depositing N480 to every dollar, which was even far higher than the rate in the parallel market.
At the end of the negotiations, the bank urged the company to deposit N680 million to cover the entire transactions, and it turned out a big frustration for the firm.
“We refused to deal, because we did not have the fund. We explained to the bank that already gave room for rate fluctuations and there was no need to provide 150 per cent cover as being requested.
The bankers went back and forth, consulting with their head office and directors. The transaction was finally approved and the bank accepted 100 per cent cover for the transaction after negotiations that lasted between four and six months.”
It was learnt that the 150 per cent import cover has become an accepted practice in the industry. The Indians, it was learnt, are willing and ready to establish LCs at any condition set by the lenders, and this has affected genuine importers and manufacturers.
The industry source said: “Besides, the interest rates we are paying in such facilities were very high. We were charged 28 per cent by Sterling Bank; GT Bank charged us 21 per cent.
“We understand that First City Monument Bank (FCMB) is charging customers 30 per cent per annum and 150 per cent import cover. These are the predicament that manufacturers and importers are facing, which I want the CBN to look into. The banks also take several fees, such as LC establishment charge, management fees, and all sort of other charges.”
The source said that establishing an LC should not take more than two weeks, but is extending to several months because of the stringent rules being set by commercial banks.
It said: “The CBN is aware of the development. It should look at what is going on in the foreign operations unit of banks. If the dollar is there, one should be able to establish an LC within two weeks, if you submit your Proforma invoice, approved Form ‘M’ and other requirements. The approved Form ‘M’ is processed online, which is then followed with making the naira cover available.”
According to the source, the ongoing delay in LC establishment, rising fees and extra naira cover are affecting the prices of goods and services.
“All these push up cost of running businesses and products. There is price in-elasticity in the newspaper industry, because we cannot unilaterally raise the prices and so, the company is forced to absorb the extra costs”, the sourecsaid.
Another manufacturer and Managing Director, Rockview Integrated Services Limited, Obinna Chizom, shared his own experience.
Chizom said: “Our business started experiencing a slowdown after mid last year after we failed to secure the needed forex to import raw materials. We initially funded our account with the bank at 100 per cent but our account officer called after three months demanding that the bank’s new rules require we fund the account by 150 per cent. The worst was that the bank refused to lend us the 50 per cent extra cash. We ended up withdrawing the cash and our business is going down at present.”
He said there was no possibility that the bank will refund any excess cash from the transaction if he succeeded in securing the extra 50 per cent.
Push for real sector
His words: “I want the CBN to look into the matter and call the banks to order. The CBN should remember that only the real sector that will bring in the desired changes we are all expecting to happen in the economy. When the banks work against the interest of manufacturers and importers, it is going to affect the economy.”
A former Keystone Bank Executive Director, Richard Obire faulted the 150 per cent import cover by banks, describing it as illogical and capable of putting the companies at the receiving end of the transactions.
He said: “That practice is wrong. The banks should charge the customer for the risk through a mutually beneficial rate and then move on to carry the risk of the transaction instead of shifting it to the customer.
“In forwards forex contracts, the prices of the naira against dollar should be agreed with the customer and the dollar delivered to the customer at a future date without default.”
The banks no longer show interest in taking any risks, yet they want to make huge profits, Obire said.
He said: “The banks want to get both the funding and liquidity from the customer beyond what the customers can afford. I suspect that since the dollar liquidity is still low, many banks want to ration the available dollar by setting tough conditions that only a few manufacturers can meet. The extra 50 per cent cover is going to give the bank float, and enhance their profitability within the period of the transaction.”
Obire urged the banks to go for pricing-based negotiation instead of asking for 150 per cent cover.
“The banks should chose the rates that cover their risks instead of demanding for 150 per cent cover, because not all companies have the level of liquidity that can absorb such conditions,” he advised.
The Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, also kicked against the policy, describing it as unfair.
“It is an unfair practice which should be discouraged. The extra 50 per cent cover is too high. Besides, many of the manufacturers might have borrowed the fund, and have to contend with high interest rate,” he said.
Demand for low interest rate
Some manufacturers have urged the CBN to initiate policies that would encourage lower interest rates and stimulate economic activities. The Monetary Policy Rate – the benchmark interest rate remains at 14 per cent since July 2016 and is unlikely to be reduced as the Monetary Policy Committee (MPC) meets today and tomorrow.
The meeting is the committee’s second in the year and it is meant to review major global and domestic economic developments since its last meeting. The projection is that the MPC will retain the benchmark interest rate- Monetary Policy Rate (MPR) at 14 per cent, Cash Reserve Ratio (CRR) at 22.5 per cent and liquidity ratio at 30 per cent.
The meeting will be coming on the back of a continuous decline in the nation’s domestic output, inflationary pressures, weak earning scorecards and forex market challenges, though some improvements seem to have been recorded in fiscal policy administration.
Not a few local and multinational companies have said that a dollar shortage, driven by the oil price crash is forcing local suppliers to patronise black market for the dollar, thereby pushing up their operational cost of.
The naira has been under pressure since the start of the oil price rout mid-2014 when crude oil prices dropped significantly.
The South African retailer Truworths and many other multinational firms quit the country, citing import restrictions and the inability to access forex among the reasons for its decision. Unilever Nigeria and Guinness Nigeria have all complained about challenges of sourcing forex.
But Head, Currencies Market at Ecobank Nigeria, Olakunle Ezun, said the practice was in order and that the banks were acting in good faith.
He said that the 150 per cent import cover was adopted by banks to enable them hedge against rising currency risks.
Ezun said: “There is this fear of devaluation, or the fear that the value of the naira might depreciate, so, a lot of banks want to hedge themselves against these risks. If a bank is opening an LC of about $30 million and asks the customer to fund the account by providing a more liquid naira.
The bank might demand that the customer provide naira cover for $45 million. There is a buffer of $15 million above the rate. The major issue is just about the uncertainty or un-quantified risk that surrounds the naira value at present,” he said.
Ezun explained that at the point of opening the LC, the naira may be N300 to dollar but by the time the LC was maturing, the naira could have depreciated to N350 to the dollar.
He said: “At that point, it would be difficult to call the customer to come and top up their account to cover the gap in the LC. The bank may not even be able to see the customer again.
“That is why the bank will from the start, ask the customer to provide a buffer, in case there is naira depreciation, the buffer would be able to cover for that depreciation.”
Explaining further, he said that over time, banks have created unwanted loans for themselves. Bad loans in the local banking system soared to more than double the limit set by the CBN as the industry struggles with an economic downturn.
The ratio of non-performing loans rose to 11.7 per cent at the end of June from 5.3 per cent at the end of 2015, the CBN, which requires banks to keep the measure below five per cent said.
He said: “In most cases, when those depreciations happen, bad loans are created for the banks. In most cases, those customers may not come back to service the loans, and that will lead to rising bad loans.
“The counterparty like the JP Morgan, HSBC, Citibank, among others are not seeing the customers, they are seeing the local bank. These local banks have learnt their lessons over time.
“For me, I do not see issues in the banks asking for the 150 per cent buffer. What is important is the interbank funded forex forwards is secured. You are buying a 90-day forex from the CBN, and you are providing naira cover for it.
“Nobody is sure what will happen to the naira in 90 days. If you are sure that in 90 days, the naira will be available at the right price, there would not be issue of asking for buffer. Even at the time you need to honour your obligation, dollar may not be available at the official rate at N305 to dollar. You may need to service your obligation at the parallel market,” he said.
Ezun said banks have learnt their lessons in a very bad way.
He went on: “Today, we are talking about rising bad loans many of them from the oil and gas sector. That is why at the end of the day, they want to hedge themselves against several risks.
“The banks need to think ahead. The bad loans are dragging down banks’ profitability and must be stopped. The only way is to provide a buffer, to ensure that the customer is committed to that transaction. That way, he cannot walk away from it.
Security for loans
“The banks have learnt to pass the risks to the customer, rather than to themselves, so that there will be no need to create loans that the customers will walk away from. The customer will tell you they did not request for the loans, and are not obliged to pay. The 150 per cent started around last year when the naira outlook became uncertain.”
Ezun said that if after the transaction, the extra 50 per cent was not used, the customer should be refunded.
He said: “The transactions are open and transparent. There will be a contract letter that the customer will sign, which empowers the bank to act. It follows a willing buyer and willing seller model. The terms are open. There is no ambiguity from day one.
“The banks would have told the customer that getting the dollar was not automatic, it would depend on the availability of dollar from the CBN. By funding the accounts shows seriousness on the part of the customer because many customers will open LCs in different banks and ask banks to bid on their behalf. But they have to fund the transactions upfront.
“I am not sure any customer has the luxury and cash liquidity to play around several banks. So, dollar availability is based on supply from the CBN. Even the CBN will tell you that dollar supply is not sure. So, there is no need to make a commitment to the customer that supply is sure.
“The 150 per cent cover is happening because there is low dollar supply. Even before now, banks used to run after customers to come and open LCs. But today, customers are begging banks to open LCs for them. In those days, when forex was everywhere, banks will market LC customers.”
Explaining further, he said that banks will prefer to do LCs for customers that funded their accounts with their own cash, than for those borrowing from the banks to fund such LCs.
“No bank today wants to grow its bad loans positions, because bad loans are weighing down on profitability. Shareholders want returns on their investments and the demand for 150 per cent cover will continue until when forex supply increases, and then no bank will have the gut to ask a customer to provide 150 per cent cover,” he said.
Managing Director, Afrinvest West Africa Plc, Ike Chioke, said that the CBN’s new forex directives to banks, to provide Personal Travel Allowances (PTA) and Business Travel Allowances (BTA) within 24 hours and medical and school fees within 48 hours to meet demand, has also eased some of the pressures in the parallel market with exchange rate appreciating 14.3 per cent since announcement.
Chioke said in an emailed report: “Whilst we believe the successful implementation of the new forex directive has eased pressure in the parallel market, flexibility in pricing and allocation of forex at the interbank market remains a sine qua non to restore confidence in the system and reinstall a market framework that would lead to a gradual normalisation of rates and also attract the much needed foreign capital into the economy.”
The CBN has consistently preached transparency in forex transactions handling. The apex bank renewed its commitment to continuously and to vigorously pursue a transparent, liquid and efficient forex market. It, therefore, foreclosed tolerating unscrupulous actions and that it would wield the big stick against erring offenders, be they banks, or their employees.
