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High MPR, CRR threaten banks’ NPL, profitability

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Aggressive monetary tightening by the Central Bank of Nigeria (CBN), in a bid to rein in inflation, is compounding Nigeria’s tough operating environment, leaving businesses in the real sector of the economy struggling with debilitating costs of production, as well as increasing banks’ exposures.

This is jeopardizing a major income stream for deposit money banks (DMBs) in the country by not only increasing the chances of loan default, but also constraining financial intermediation with negative consequences for the banking system and the economy at large.

At its latest meeting, the Monetary Policy Committee (MPC), of the Central Bank of Nigeria, CBN, raised the benchmark Monetary Policy Rate (MPR), by 50 basis points to 27.25 per cent from 26.25 per cent.

This is the fifth consecutive hike this year, totalling 850 basis points since February. It is also the 12th time the MPC has raised rates in two years as the monetary authorities battle high inflation to stabilize the economy.

The committee retained the asymmetric corridor at +500 and -100 basis points around the MPR. It increased the cash reserve ratio (CRR) for banks from 45 per cent to 50 per cent while retaining the liquidity rate at 30 per cent.

While the CBN’s persistent monetary tightening stance means businesses must cope with higher borrowing costs, increasing the CRR for banks means more loanable funds have been sterilized. This further impairs the financial intermediation capabilities of banks.

Checks by Business Hallmark showed that Nigeria’s banking reserves surged to N26.8 trillion in August 2024, a substantial increase from N19.4 trillion a year earlier, as a result of continued monetary tightening.

Analysts see the policy steps as having grave implications in an economy, where businesses are already reeling from high energy, logistics, and operating costs compounded by declining purchasing power that has forced some multinationals to abandon Nigeria.

The organized private sector insists businesses need stimulus to drive recovery and growth. With effective lending rates hovering around 35 per cent, further rate hikes, according to them, will have a crippling effect on manufacturers and other economic players.

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The National President of the Association of Small Business Owners of Nigeria, Dr. Femi Egbesola, reacting to the latest MPR hike said, “This definitely will push up further the cost of doing business, and ultimately, the cost of goods and services. The manufacturing sector may contract more as fund liquidity and profitability will surely reduce.

“The banks or financial institutions may witness more bad debts as many borrowers may find it difficult to live up to their loan obligations. This will result in banks being averse to lending to the real sector.”

The Centre for the Promotion of Private Enterprise (CPPE), said the MPC’s decision to raise the MPR to 27.25 per cent was damaging to investment and economic growth.

Founder of CPPE, Dr. Muda Yusuf, in a statement sent to our correspondent said, “The implications of the latest MPC decision for investors are quite concerning, as cost of funds would be further exacerbated, possibly well above 35 per cent or more.”

Yusuf argued that the increase in CRR to 50 per cent would “constrain financial intermediation with negative consequences for the banking system and the economy.”

An economist, Dr. Boniface Chizea, wondered why the banks are coping with monetary policies that leave them with very little of their deposits to operate with, describing it as a major hindrance to their financial intermediation role.

According to analysis by a major national daily, the manufacturing, oil & gas, and commerce sectors contributed majority of Nigeria’s top 10 banks’ estimated N1.6 trillion Non-Performing Loans (NPL) in the 2023 financial year.

The 10 banks include: FBN Holdings Plc, Zenith Bank Plc, Access Holdings Plc, United Bank for Africa (UBA) Plc, and Guaranty Trust Holdings Company Plc (GTCO).

Others are:  Wema Bank Plc, Sterling Financial Holdings Company, Stanbic IBTC Holdings Plc, FCMB Group Plc and Fidelity Bank Plc.

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The analysis showed that cumulatively, the NPLs of the the 10 banks went up by 65 per cent from N964.36 billion in the 2022 to N1.6 trillion in 2023. Consequently, the lenders wrote off multi-billion naira non-performing loans to de-risk their balance sheet and improve asset quality. This negatively affects their profitability.

Specifically, weak crude oil prices impacted the oil & gas sector negatively, while the manufacturing sector was faced with high cost of operation, foreign exchange losses amid CBN policy on foreign exchange market, and weak purchasing power by consumers.

Other sectors are faced with a hike in inflation rate across Sub-Saharan Africa. Inflation rate was persistently on increase throughout 2023, mainly driven by high food prices, a weak local currency, and rising cost of inputs.

A member of the MPC, Philip Ikeazor, in his personal statement at the meeting in March 2024, said, “The imbalance between the exposure of the oil and manufacturing sectors, and their poor contribution to growth is worrisome, even as NPLs continue to rise. Considering their vulnerability to rate hikes, consecutive aggressive tightening will further depress the economy. The pressure point is already manifesting as indicated in the projected contraction of PMI in the industrial sector by 7.1 index points occasioned by rising input cost and low-capacity utilization.”

Meanwhile, the Federal Government is set to collect N614.9 billion from nine Nigerian banks on a one-time windfall tax from their foreign currency revaluation gains for the financial period, December 2023.

The Senate had passed an amendment bill of the 2023 Finance Act, raising the windfall levy on banks’ foreign exchange revaluation gains from 50 percent as proposed by President Tinubu to 70 percent

Global rating agency, Moody’s in a recent report noted that the windfall levy on Nigerian banks’ foreign exchange revaluation gains is credit negative for banks.

According to the report, the tax will significantly reduce the profits available to banks for problem-loan provisioning and transfers to retained earnings, which form part of regulatory capital, both credit negative for the sector.

“The windfall tax will have a, particularly, negative effect on banks whose capital adequacy is close to regulatory thresholds. The tax follows record profits declared by banks in 2023, largely because of foreign-currency revaluation gains related to the naira’s massive devaluation of 37 percent in June 2023,” the report said.

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