Bank credit to oil and gas companies in Nigeria rose 78 percent to N11.8 trillion ($27 billion) in 2023 with the naira devaluation stoking the surge.
Findings showed the oil and gas sector topped all sectors with the highest bank credit allocation, outpacing manufacturing (N7.73 trillion) and Finance, Insurance & Capital Market (N4.33 trillion) in 2023.
Banks find lending to the oil and gas sector, the single biggest earner of foreign exchange for Africa’s top oil producer, attractive because of the companies’ huge capital outlays, large intraday cash flows (in the case of downstream companies), and sizable foreign currency inflows (in the case of upstream and midstream companies).
Data from the Central Bank of Nigeria (CBN) indicate that oil and gas firms have the most foreign currency (FC)-denominated debts, and their naira equivalents surged on the back of the large devaluation in June which paved way for a near 40 percent decline in the naira’s value against the dollar at the end of the year.
…Accounts for 26% of total loans
Firms operating in the upstream and services sub sectors owed N8.3 trillion, up from N4.8 trillion in May 2023 while the downstream, natural gas and crude oil refining subsectors owed N3.4 trillion as of December 2023 as against N1.9 trillion in May.
“If oil firms can restructure their costs or increase revenue or both so that the extra costs from the higher interest rates are cancelled out, then it may not lead to higher NPLs. So it’s a concern at best but not a certainty and depends on various factors that are too early to tell,” the chief financial officer of a tier-one bank said.
“The industry NPL ratio of 4.15 percent at the end of January 2024, which is itching towards the industry regulatory threshold of 5 percent should be monitored closely,” he added.
David Omojomolo, Africa economist at London-based Capital Economics, said for borrowers who only earn naira, servicing these debts will become more expensive.
“That said, while data is hard to come by, loans to the oil and gas sector – whose income is in dollars – probably account for a large share of total foreign currency lending,” he said.
… banks allowing loan repayment till maturity – IMF
A new report by the International Monetary Fund (IMF) said although non-performing loans of Nigerian banks stood at 4 percent for commercial banks but it’s rapidly increasing at microfinance banks (14 percent), development finance institutions (19 percent), and mortgage banks (20 percent).
“Some commercial banks have delayed NPL recognition by granting bullet loans,” IMF said in its latest article IV document.
A bullet loan is a type of loan in which the principal that is borrowed is paid back at the end of the loan term.
“To ensure that banks are well-prepared to deal with rising NPLs, it is critical to increase banks’ minimum capital and fully adopt the Basel 3 capital framework. Regulatory forbearance should be phased out, with continued tight supervision to mitigate emerging risks,” IMF said.
Further findings showed companies in the manufacturing sector recorded the second biggest increase as their debts rose by 35 percent to N7.7 trillion December 2023 from N5.7 trillion in May 2023.
Loans in the finance, insurance, and capital market sector witnessed a surge in lending, with total borrowings reaching N4.33 trillion in 2023, up by 64 percent from N2.6 trillion in May last year.
“The imbalance between the exposure of the oil and manufacturing sectors and their poor contribution to growth is worrisome, even as non-performing loans (NPLs) continue to rise,” Philip Ikeazor, deputy governor of financial system stability of CBN said in his personal statement at last Monetary Policy Committee meeting in March.
He added, “Considering their vulnerability to rate hikes, consecutive aggressive tightening will further depress the economy”.
Africa’s biggest economy grew at a slower pace at 2.74 percent in 2023, inflation rate in Nigeria remains high at 33.2 percent, the highest in three decades while the money policy rate – the benchmark interest rate – was raised in March to 24.75 percent, the highest in more than two decades.
“This rate hike will result in the repricing of loans previously created by deposit money banks. This repricing would trickle down to increased obligations by the borrowers, thus, the likelihood of default increases,” Charles Akinbobola, a Lagos-based energy analyst, said.
BusinessDay’s findings showed the trade and general commerce sector saw the fourth-largest jump, with borrowings reaching N3.55 trillion, a 52 percent increase from May last year. Similarly, the information and communication sector borrowed N1.98 trillion, reflecting a 46 percent rise from last May.
The general sector, encompassing various businesses, also saw a substantial increase in borrowing, reaching N3.95 trillion in 2023, up 44 percent. Government borrowing, including state and local governments, grew moderately at 13 percent, reaching N2.69 trillion in 2023.
Other sectors also witnessed significant borrowing growth. The construction sector borrowed N1.82 trillion, a 50 percent increase, while the power and energy sector saw a 44 percent rise, reaching N1.32 trillion in 2023. Even the agriculture sector increased its borrowing by 29 percent, reaching N2.26 trillion in 2023.
