Banks have been under pressure in recent months as the Central Bank of Nigeria’s (CBN’s) directive for them to lend 60 per cent of their deposits to private sector takes effect. Other regulatory policies were also meant to get more loans to critical sectors of the economy. Although more loans to businesses are good for the economy, costly implications of rising non-performing loans could put lenders’ assets at higher risks. A follow-up policy that allows banks to seize loan defaulters’ deposits across the industry could ginger lenders to lend more to the economy, writes COLLINS NWEZE.
RICHARD Moses, an insurance broker, requested for salary advance loan from a bank. The N350,000 collateral-free loan was disbursed to him in March. But the decision he took afterwards surprised many people, including his employer for 10 years.
Moses, whose salary account is domiciled in Keystone Bank, quickly abandoned the account after withdrawing the money. He opened a new salary account with another lender and abandoned the loan repayment agreement. Moses’ account officer took the matter to his employer.
“The employer started paying his salary into the old account when the matter was brought to the company’s attention. That was how the loan was fully repaid including the accrued interests. But he was fired afterwards for breach of trust,” the account officer, who spoke anonymously because he was not authorised to speak for the bank narrated.
What Moses did capture challenges faced by many banks in recovering loans from borrowers with no intention of paying back.
Guaranty Trust Bank Plc Managing Director Seguin Agbaje was referring to the likes of Moses when he spoke at the last month’s Bankers’ Committee meeting in Lagos.
He said: “Banks are now giving salary advance loans to customers. It is pure consumer credit. Unfortunately, after some people take a loan, they will abandon their account, and start doing business in another bank. The salaries will go to the new bank”.
This is happening at a time that the Central Bank of Nigeria (CBN) directed banks to lend more to the private sector instead of investing their funds in government securities.
The CBN directed banks to lend a minimum of 60 per cent of their deposits by September 30, or have their Cash Reserve Requirements (CRR) raised.
That implies that defaulting banks will be forced to leave more of their cash with the CBN. The Loan to Deposit Ratio (LDR) in Nigeria is around 40 per cent, compared with 78 per cent across Africa, and above 90 per cent in South Africa and about 76 per cent in Kenya.
The policy was also followed by another CBN order empowering banks to get debtors to sign asset seizure pact with them. The agreement gives banks access to loan defaulters’ deposits across the industry to pay their debt.
Besides, the CBN has also cut the amount of money lenders can keep in its interest-bearing accounts by 73 per cent to N2 billion. The policy reduced the remunerable daily placement of the Standing Deposit Facility (SDF) from N7.5 billion to N2 billion. The SDR attracts an interest rate of Monetary Policy Rate (MPR) minus 500 basis points, which is 8.5 per cent per annum up to the limit of N2 billion, while any deposit over and above the maximum will attract zero interest rate.
Also, to ensure that more loans get to the real sector of the economy, the CBN plans to restrict banks’ unfettered access to government securities- Treasury bills and bonds to ensure more private sector operators get loans. But the policy would lead to revenue loss for banks as government securities constitute nearly 20 per cent of their annual earnings.
CBN Governor, Godwin Emefiele said banks’ access to government securities will be restricted, with policies and regulations for the policy shift being perfected.
He said: “In view of the abundant opportunities available to banks for unfettered access to government securities, which tends to crowd out private sector lending, we will provide a mechanism for limiting commercial banks access to government securities. This will redirect banks’ lending focus to the private sector to stimulate growth in the economy”.
Emefiele believes that for the economy to grow, banks must be seen to perform their intermediary roles effectively.
CBN’s loan policies: fears vs hopes
These policies were meant to allay banks’ lending fears and ginger them to lend more with many customers seeing the 60 per cent Loan to Deposit Ratio (LDR) policy for banks as a turning point in their ability to have access to credit. Many customers are already excited over the policy shift.
For instance, Managing Director, Business and Bloom Services Limited, Azu Stephens, has been in good spirits since mid-July when the policy was announced.
The entrepreneur who for the last one year has been unable to secure a N1 million loan from a commercial bank thinks the new CBN’s policy will improve his chances of getting the loan. Stephens said he will return to the bank to further press for the loan.
Statistician-General of the Federation, Yemi Kale said he was worried that over 82 per cent of the Micro Small and Medium Enterprises (MSMEs) operators do not have access to bank loans.
He said that for the majority of enterprises – both Micro and Small and Medium Enterprises – personal savings was the most common source of capital, accounting for 61.2 per cent of their funding. Only 17.5 per cent of the operators got their funding from banks while the rest relied on friends and family members to get badly needed finance.
HE said the interest charges on loans, sometimes as high as 45 per cent per annum, is also making it difficult or almost impossible for borrowers to payback.
“There’s a widespread lack of capital and poor integration into the financial markets, which may be due to low business planning incidence and low formalization. Most enterprises are operating without legal and financial protection,” Kale disclosed.
Like Stephens, Kale is confident that the scenario might change soon after the CBN rolled out two polices in one week to force banks into lending more to the economy.
Findings showed that the CBN first tried to induce banks into giving more credit through incentives such as discounted capital and reduced CRR, which failed like a pack of cards. Many banks are not always willing to lend because of fear of the loans going bad.
The poor state of the economy, especially poor infrastructure and rising bad loans are creating a low appetite for risk among banks and hindering their profit growth. The economy is projected to expand 2.1 per cent this year by the International Monetary Fund, which is slower than the population growth.
DIRECTOR, Financial Markets Department at the CBN, Mrs Angela Sere-Ejembi, defended the SDF policy insisting that any bank deposit over N2 billion shall be at zero interest.
But there is also a carrot approach to the new drive to get banks to lend more. Another CBN Director, Banking Supervision, Ahmed Abdullahi, said that lending to small businesses, consumers and mortgages will be assigned a weight of 150 per cent when computing the CRR. He said banks that fail to meet the minimum loan-to-deposit ratio by September 30, will be forced to reserve more funds with the CBN.
Managing Director, Access Bank Plc, Herbert Wigwe, agreed with the CBN’s decision to introduce penalties in a bid to stimulate lending, especially to small and medium-sized businesses.
He said that policies alone without appropriate sanction to defaulting banks will not work. He also said that the two policies will help stimulate the economy through improved lending. For him, despite short time given to banks to comply with the LDR requirement, the lenders will nonetheless comply thereby helping small and medium-scale enterprises begin to grow.
SunTrust Bank Limited Managing Director Ayo Babatunde said the CBN LDR policy may push some banks to increase lending to high risk-borrowers, with the potential of incurring heavy losses.
To ensure lending to Small and Medium Enterprises (SMEs), retail, mortgage, and consumers, Babatunde said the CBN assigned a weight of 150 per cent to them in the computation of LDR.
“Failure to meet the minimum LDR of 60 per cent by the specified date will result in a levy of additional Cash Reserve Requirement (CRR) equal to 50 per cent of the lending shortfall of the target,” he said.
Babatunde said specific guidelines were required to clarify whether the LDR computation would focus on gross or net loan position.
Also to be clarified is whether earlier exposure to the preferred sectors can be aggregated for the LDR computation and likely forbearance to banks with high NPLs to the preferred sectors, such as SMEs, retail, mortgage and consumer lending.
Head Currencies Market at Ecobank Nigeria, Olakunle Ezun, said the LDR policy alone will free over N1 trillion for lending.
“By this regulation, the CBN aims to improve market liquidity, and subsequently encourage deposit money banks to increase lending to the productive sector of the economy. This comes with the additional incentive of a weight of 150 per cent to the preferred sectors in the computation of loan to deposit ratio,” he said.
Ezun said the impact of the new guideline on SDF will force the banks to carry out their core responsibility of intermediation. He said that while the CBN’s reason for the policy is to encourage banks to lend to the productive sector, it is not clear how it intends to achieve this objective.
“Given the internal risk framework of most bank and their disposition to increase lending to riskier borrowers, potentially with looser underwriting or under-pricing outlook, the risk acceptance framework will have to come to play. While the liquidity in the market will rise, the lenders will have to channel the funds to real sector lending,” he advised.
PRESIDENT, Nigerian Association of Small and Medium Enterprises (NASME), ‘Degun Agboade, said banks should listen to the CBN and grant more loans to businesses. For him, more loans will reduce the odds against businesses, give room for expansion and job creation.
“I know the level of bad loans in the industry is high, but that is not an excuse for banks not to lend. There are millions of genuine borrowers shut out of the system. This economy needs more loans, while sanctions should be applied to borrowers that refuse to pay back borrowed funds,” he said.
An Abuja-based small business owner, Silas Obinna, said aside from having access to the loans, there is also need to review the rates at which the banks lend to businesses. “Now that the solutions seem to have been found, there is also a need to consider the high lending rates that make it difficult for borrowers to payback. Nigerian lending rates remain one of the highest in the world. We have businesses borrowing at 40 per cent to 45 per cent rate per annum which is an innovation to loan default,” he said.
He added: “There must be access to capital at a reasonable price. With 26 per cent interest rate, you cannot do business successfully. So, we must find a way to provide interest rate to everybody at a reasonable rate. We must have an interest rate that will support our economy. And it cannot be much higher to the borrower at 12 to 15 per cent. Every Nigerian should be able to borrow money at between 12 to 15 per cent, so, we must have capital available.
Government securities vs real sector loans
Risk-averse commercial banks have been scrambling for government securities to lock in relatively high returns on deposits. The rush for government securities is cutting lending to the private sector, especially small businesses.
Although, the majority of banks know the important roles played by the private sector in driving economic development, their involvement in financing this segment remains low.
Banks have attributed their limited funding to the sector to the risk involved in lending to the segment. However, the biggest challenge has been the government’s rising borrowing, which is crowding out the private sector from accessing needed loans.
In the last year, the top five lenders by asset size invested N4.5 trillion in Treasury bills and bonds and loaned about N2 trillion to the private sector operators.
Besides, the income from the investments in government securities are tax-free, hence, not many investments can match this kind of returns.
Already, the secondary market (discount) rate on Treasury bill is expected to trade between eight per cent to 10 per cent for 91-day maturity and below and 11.5 per cent for tenor above 91-day maturity. The secondary market yield on the bond is expected to moderate downward to sub 13.5 per cent for tenor above five-year in the short term.
With near risk-free government bonds offering yields of more than 13 per cent, there is little incentive to lend. An economist, Okechukwu Unegbu, said limiting banks from investing in bonds has certain implications, including creating excess liquidity that will make it difficult for policymakers to control inflation and stabilize the naira.
MANAGING Director/, FMDQ OTC Securities Exchanges, Bola Onadele, aid if the CBN succeeds in putting caps on what a bank can hold on government securities, it will bring more money to the real sector.
“The demand for government securities will go down, the price will drop, the yield will rise, meaning that government will borrow at a much higher rate,” he disclosed.
Debt Management Office (DMO) Director, Portfolio Management Department, Oladele Afolabi, said the impact of the proposed limitation of commercial banks’ access to government securities on the market will depend on specific mechanisms provided by the CBN.
He said: “For instance, how would ‘Government Securities’ be defined? Would this include the Open Market Operations (OMO) bills being issued by the CBN? The specifics of the mechanism would determine the impact on the market.” For him, the bond market has grown beyond banks being nominated investors and is now attracting new categories of investors.
Afolabi said the new categories included the pension funds, asset managers and foreign investors, all with significantly higher levels of participation than before.
The director added that the DMO had been working with other stakeholders to encourage a higher level of issuances by private sector organisations and the Federal Government granted tax waivers in that regard.
“This is a sign of maturity of the Federal Government bond market and we expect to continue to diversify the investor base for government securities particularly with new instruments such as the Sukuk, Savings Bond and Green Bond.”
He said they were attracting new investors to the market.
According to him, the DMO’s initiatives in the bond market are not just for the Federal Government’s borrowing, but to also create a market for long term capital for other categories of issuers, such as sub-nationals and corporates.
Afolabi disclosed that banks were still expected to continue to play a key role as investors in the market as the Federal Government bonds were liquid assets which they would need to hold to meet the 30 per cent liquidity ratio.
Director-General, Lagos Chamber of Commerce and Industry, Muda Yusuf, said investments in Treasury bills and Federal Government bonds have become more attractive than investments in the real economy such as manufacturing, agriculture and solid minerals.
He said: “It has created a serious crowding out effect on private sector credit. Even the financial institutions would rather invest in government securities rather than lend money to entrepreneurs. This condition has been created by the high cost at which the government borrows – the high yield on Treasury bills and Federal Government bonds which are in the 13 per cent threshold.”
Yusuf said that policymakers should consider ways to improve lending to the economy by de-risking the real sectors. The government should fix decaying infrastructure, high cost of doing business and low consumer purchasing power that have hindered companies from growing operating profit that would empower them to pay interest on loans borrowed from financial institutions.
FINANCIAL pundits believe that the policies could mean that more credit would be channelled to the private sector if religiously implemented. Unfortunately, the policies could also compel banks to give loans to sub-prime creditors, leading to higher non-performing loans which are risky for the financial system stability.
In the longer term, they insisted that more stringent regulations can be positive for the economy but negative for the banks in terms of higher non-performing loans that could further deteriorate the industry’s asset quality.