Published On: Sun, Aug 26th, 2018

More banks shun lending despite rising liquidity

By FELIX OLOYEDE

Banks in Nigeria have chosen to avoid commercial lending as a source of revenue generation despite growing domestic liquidity in the economy. Indeed, a rising number of bank managers have decided that given local economic uncertainty, especially against the background of looming trouble with the forthcoming general elections in 2019, the clever way to protect corporate  balance sheets would be to trade primary and secondary market  treasury bills (T-bills )and foreign exchange (FX). Recent data released by the National Bureau of Statistics’ (NBS) shows that lending by primary credit institutions have fallen off a cliff.

The just released Selected Banking Sector Data:  Sectorial Breakdown of Credit e-Payment Channels and Staff Strength for second quarter of 2018 of the NBS shows that despite a 13.23 per cent rise in deposits in banks to N23.22 trillion between June 2017 and midyear 2018, credit to the private sector has dipped -2.36 per cent to N15.34 trillion within this same period as commercial lenders are reluctant to expand their risk assets.

Banks have been indisposed to increasing their loans portfolio after the country’s 18 months recession, which brought the Africa’s largest economy to its knees between 2016 and June 2017, causing the banking industry to break the regulatory ceiling for non-performing loans (NPL) as many companies could not meet their loan obligations. During this period the banking sector delinquent loans to total credit ratio (NPL ratio) shot above the Central Bank of Nigeria (CBN) 5 per cent threshold to well over 15 per cent. But it has slowed down to about 13 per cent with the recovery of the economy in June 2017.

The high interest rate regime in the country has posed a great challenge to access to credit by the private sector, explained Professor Leo Ukpong, Financial Economist and Dean, School of Business, University of Uyo. “Because of high interest rates, people prefer to increase savings. The problem is that people who need to borrow money cannot do so because of staggering interest rates, despite increasing liquidity in banks.”

The harsh operating environment has not given entrepreneurs and investor’s incentive to expand their investments, Dr. Adi Bongo, Economist and Faculty Member, Lagos Business School declares. “None of the banks or financial institution is comfortable with the risk in the system. That tells you that the interest rate is still higher than what an average investor in the market can take,” he further noted.

The Monetary Policy Committee (MPC) of the CBN has pegged the benchmark interest rate (also called Monetary Policy Rate, MPR) at 14 per cent since July 2016 despite incessant calls from the private sector for its downward review. But the MPC has insisted that the environment was not right for lowering of interest rate as inflation rate was still above 10 per cent, while the CBN targets single digit. And during its last meeting in July, the MPC listed fear of the impact of political spending would have on inflation and US interest rate hike as reasons for holding rates.

“You cannot grow an economy by savings. You have to produce something. The signal is that we may witness a slowdown in the GDP, because unless the private sector, which is the engine of the economy, is borrowing, we may see a slack down in output,” Prof. Ukpong told Business Hallmark.

The economy grew 1.95 per cent in the first quarter of 2018, driven by improved crude oil production and price. Oil price has appreciated 41.35 in the last one year, with Brent closing at $72.13 per barrel on Friday.

Accordingly, Nigeria has generated more revenue within this period as federal allocation has risen 78 per cent from N462.36 billion in June 2017 to N821.86 billion in June 2018. This has buoyed liquidity in the financial sector as all tiers of government now have money to spend. For instance, Osun State which has been paying its workers half salaries in the last three years, recently started paying them full salaries. More so, many contractors who left sites due to lack of finance have now returned.

Nonetheless, this improved liquidity in the financial system has not spurred lenders to renege on their stance on tightening their risk assets in order to cut their high non-performing loans. For instance, FirstBank of Nigeria, a subsidiary of FBN Holdings in 2017 decided not to extend beyond N30 million credit to a single borrower as part of strategies to reduce its toxic loans, which is the highest in the country’s banking industry. Its NPLs stood at 20.8 per cent at the end of June this year, having made significant success in trimming it from 26 per cent in 2016. And one of the measures it employed in reducing its delinquent loans was slashing loan portfolio by -4 per cent in the first half of 2018.

And like FBN Holdings, GTBank, the most capitalized commercial lender on the Nigerian bourse, in response to its NPL ratio which up ticked from 3.71 per cent in June 2017 to 5.75 per cent in the first six months of this year, sliced its risk assets by -6.8 per cent, though its deposits swell 10.4 per cent during this period.

And in spite of Union Bank’s deposit advancing 2 per cent between December 2017 and June 2018, it cut down its loans and advances by -9 per cent as part of efforts to scale down its NPL ratio to 10.8 per cent in June this year from 19.8 per cent at the end of 2017.

Meanwhile, the Central Bank has been campaigning for commercial lenders to extend more credits to critical sectors of the economy, but they seemed unperturbed as they continued to maintain bridled risk appetite and are more concerned about reducing their NPL ratio. The apex bank and banks had agreed in 2017 to disburse N26 billion Agric SMEs equity fund. The regulator has intervened in the economy with over N1 trillion at the end of 2017. But entrepreneurs still complain of the bottlenecks they encountered while trying to access these intervention funds, which are disbursed at a single digit interest rate.

Dr Bongo has canvassed for an increase in investments to create jobs in order to address the country’s high unemployment rate, which was 14 per cent in the third quarter of 2017 but has since risen to 18.8 per cent; the CBN, in Bongos opinion, must lower interest rates. He argues that government has also to tackle the challenges of poor infrastructure, ease of doing business, power, etc, which have combined to heighten risk in the economy.

 

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