Need for de-risking retail, SME sector for increased bank lending

The recently ease in the Monetary Policy a Rate (MPR) by the Central Bank of Nigeria (CBN) may not immediately translate to increased lending to the real sector, specifically, given the high risk retail and Small and Medium Enterprises (SME)) loan segment, according to analysts.

The various challenges according to analysts would require more adjustments by the fiscal authorities to de-risk the sector. However, with the restriction on all cheap income lines, we expect a significant medium term expansion in credit to the private sector (currently at N19.1trillion October 2015 and up 6.8% Year-on-Year) by DMBs. This will necessitate banks to improve on their risk management framework to identify opportunities and earn a relatively higher margin (compared to the cheap rates in the fixed income market, Ayodeji Ebo, head, investment research, and his team of analysts at Afrinvest Securities limited, said in a report.

The Monetary Policy Committee (MPC) at its last meeting for the year held last week, assessed the prevailing policy of the central bank to leave the market awash with liquidity in a bid to foster credit expansion by Deposit Money Banks (DMBs) to the Real sector. However, the committee noted that the expected impact was yet to be met and it was against this backdrop that the MPC decided to reduce MPR from 13.0 percent to 11.0 percent, adjust the asymmetric corridor around the MPR  to +2.0 percent and -7.0 percent from +/-2.0 percent and slash Cash Reserve Ratio (CRR) further from 25.0 percent to 20.0 percent.

The analysts see the 200bps cut in MPR and introduction of an asymmetric corridor around the MPR at +200bps and -700bps are the most significant of the policy decisions reached as this brings the Standing Lending Facility and Standing Deposit Facility rates to 13.0percent and 4.0 percent from 15.0 percent and 11.0 percent respectively. The 5.0 percent cut in CRR is expected to add approximately N771.4billion to liquidity level based on October data from the CBN. A caveat was added, that the additional liquidity would be released on a condition that the funds will be channelled to the real sector. The more accommodative stance is expected to drive yields downwards in the secondary Bonds market as dealers are likely to bid-down on current rates in anticipation of lower yields at the primary market auction.

“We expect NIBOR rates currently at 8.5 percent on average to adjust to the new SLF rate to an average of 7.1 percent (if the same spread is maintained) whilst average yields on T-bills and Bonds market have fallen to 3.1 percent and 9.5 percent respectively. Given the lower financial market rates, we expect slight reduction in prime lending rate”, they said.

“We anticipate Interest income earned by banks on investment securities and loans to reduce in the first quarter of the year as banks adjust to the lower primary auction rates in T-bills and bonds markets and reduced interbank rates. Cost of Funds will reduce but only marginally due to, 25.0 percent of MPR minimum mandated interest rate on savings deposits and the 80.0 percent maximum Loan to Deposits ratio regulation by the CBN that will continue to drive demand for deposits”.

The CBN’s action to buoy aggregate demand side of the economy by increasing liquidity levels and reducing market rates will have a feedback effect on price and exchange rate stability in the short to medium term. As the CBN has remained resolute in its resolve to keep administrative measures in place to reduce depletion in the FX reserves and create a contrived stability in interbank FX rates, the effects would be felt in the parallel market for FX where rates would further depreciate.

The analysts estimate a conservative FX rate of N255.00/US$1.00 at the parallel segment. The strong pass-through of lower exchange rate on consumer prices in Nigeria suggests high inflationary pressure is inevitable in the short to medium term.

HOPE MOSES-ASHIKE