Banks risk higher NPLs as CBN tightens MPR

BY EMEKA EJERE

Deposit Money Banks in the country may face increasing exposure of the commercial assets, which will lead to high loan default, as the Central Bank of Nigeria (CBN), continues to adopt tight monetary policy approach in a bid to tame inflation, thereby jeopardizing a major income stream for the lenders, and putting their profitability and in doubt, as mandatory provisioning is required in accordance with the Prudential guidelines. 

Experts worry that the Non-Performing Loans (NPLs) in the nation’s banking industry are bound to rise as the hike in Monetary Policy Rate (MPR) triggers a rise in interest rate.
It is expected that as banks adjust their interest rate to align with the serial monetary tightening, it will become increasingly difficult for borrowers to repay their loans.

The CBN had after the Monetary Policy Committee (MPC) meeting in Abuja penultimate week raised the MPR, which measures interest rate from 16.5 per cent to 17.5 percent, noting that decelerating inflation is not enough to halt interest rates just yet.

Specifically, the MPC raised the monetary policy rate by 100 basis points to 17.5 per cent and kept the asymmetric corridor at +100/-700 basis points around the MPR. The Committee retained Cash Reserve Ratio (CRR) by 32.5 per cent while liquidity ratio was kept at 30 per cent.

The latest MPR hike suggests that the apex bank is continuing with the hawkish rate policy started in 2022. Recall that the CBN had raised interest rates by a cumulative 500 basis points last year in a bid to tame the rising inflation rate in the country.

The decision to further tighten the monetary policy rate was made despite the moderation of the headline inflation rate in December 2022 to 21.34% from 21.47% recorded in the previous month.

Announcing the committee’s decision, CBN governor, Godwin Emefiele said, “MPC was of the view that although inflation rate moderated marginally in December, the economy remained confronted with the risk of high inflation with adverse consequences on the general standards of living.

“Committee, therefore, decided to sustain the current stance of policy at this point in time to further rein in inflation aggressively.

“MPC voted to raise the MPR to 17.5 per cent, retaining the asymmetric at +100/-700 basis points around the corridor.”

This, analyst believe, will not only translate to higher interest rate, but will also propel higher inability of customers to pay back their loans.
Following the 150 basis points (bps) rate hike in May 2022, which brought the MPR to 13 per cent from 11.5 per cent, banks had readjusted their lending rates. Lending rates before the rate hike hovered between 12 and 40 per cents but as at July 15, lending rate was between 12 and 44 percents in the banking industry.

A professor of Capital Market and Chairman Chartered Institute of Bankers of Nigeria, Abuja Branch, Prof. Uche Uwaleke, noted that a higher benchmark interest rate would mean that borrowers will have to pay more to the banks, adding that the more the MPR is increased, the more likely that the asset quality of banks will deteriorate.

Uwaleke also noted that the higher MPR would mean the cost of government servicing its domestic debt obligations will also increase.
‘’The cost of borrowing by the government is also influenced by the MPR and the higher the MPR, the higher the cost of borrowing by the government’’, he said.

‘’That is why on the fiscal side, the fiscal authorities will not support frequent increase in the MPR.

“But the central bank has a duty to tame inflation. So, that is why in most economies central bank is meant to be independent. Otherwise the fiscal authority may want to keep interest rates low so they can borrow at a cheaper rate.

‘’So raising the MPR will increase cost of borrowing. And that will mean cost of establishing domestic debt will, of course, increase.”

The Founder/CEO, Centre for the Promotion of Private Enterprises (CPPE), Dr. Muda Yusuf warned that the CBN should resist the temptation of further monetary policy tightening, saying that approach should be put on hold.

According to Yusuf, the Nigerian economy is not a credit driven economy, which is why the tightening outcomes has been inconsequential as a tool to tame inflation.

He noted that as at October 2022, credit to the private sector as a percentage of GDP was 22.7% in Nigeria. The percentages for other countries in 2020 according to World Bank were 32% in Kenya; 96% in Morocco; 193% in Japan; 143% in UK; 216% in the United States; and 39% was average for sub-Sahara Africa. This, he said, underscores the need for variabilities in policy responses.

“Sustained tightening penalizes entrepreneurs (especially the real sector) increases cost of credit and rate of default with heightened prospects of a backlash on growth,” Yusuf said.

After the CBN raised its main monetary policy rate by 150 bps in September last year, a report by S&P Global Ratings released in October suggested that banks in Nigeria could see reduced earnings, alongside weaker lending growth and asset quality going forward.

The MPC’s move not only raised the repo rate to 15.5 per cent, but also banks’ cash reserve requirement to a minimum of 32.5 per cent (up 500 bps), amid persisting foreign exchange shortages in the country.

In the report published about Nigerian banking, S&P Global Ratings observed that banks’ earnings would fall as non-performing loans increase and net interest margins decline.

“We expect the banking sector’s NPL ratio will deteriorate to 5.5 per cent on average in 2022 after improving to five per cent at year-end 2021, while the return on equity moderates to 13 per cent from 14 per cent.

“This is because of a weakening environment. Dollar-denominated oil revenue from the large oil producing companies has been under pressure amid lower oil production, due to oil thefts, pipeline leaks, and terminal shutdowns in 2022,” S&P stated.

It further noted that the increase in the MPR and intervention funds rate suggests that the CBN has not closed the taps entirely, since banks should still be able to extend credit to priority sectors such as agriculture.

Rising NPL

Available records show that the value of 12 banks NPL increased by 3.9 per cent to N1.15trillion as of half year (H1) ended June 30, 2022 from N1.109 trillion reported in 2021 financial year.

Despite severe macroeconomic challenges, the 12 banks in the period under review granted a whopping sum of N27.31 trillion as net loans and advances to customers, representing an increase of 10.7 per cent from N24.67trillion reported in 2021.

The 12 banks are: Access Holdings Plc, Zenith Bank Plc, Guaranty Trust Holding Company Plc (GTCO), United Bank for Africa Plc (UBA), FBN Holdings and Ecobank Transnational Incorporated (ETI).
Others are: Wema Bank Plc, FCMB Group, Union Bank of Nigeria Plc, Fidelity Bank Plc, Stanbic IBTC Holdings Plc and Sterling Bank Plc.

Checks revealed that with the banking sector’s NPL ratio closing H1 2022 at 4.95 per cent compared with 5.7 per cent in H1 2021, a total of nine banks reported NPL ratio below the five per cent ratio stipulated by the banking sector regulator.

Analysts believe severe domestic and foreign macroeconomic challenges impacted on banks loans to customers, leading to hike in the banking sector bad loans in the period under review.