• Sunday, June 23, 2024
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Credit to private sector may stretch 5-year low on rising NPLs


Credit to the private sector may stretch its five- year low growth rate recorded in March (2016), BusinessDay has found.

Hard hit by rising Non-Performing Loans (NPLs) and capital erosion, lenders’ in Africa’s largest economy are growing risk averse by the toss of a dice and cutting down on credit extension.

In March 2016, growth in private sector credit dipped 1.6 percent to N18.57 trillion (year-on-year), the lowest since a 6.0 percent contraction in 2011 to N9.46 trillion from N10.05 trillion in 2010, as deduced from the Central Bank of Nigeria (CBN) website.

“The decline will ensue, as a result of banks’ risk averseness, given rising NPLs and the private sector’s subdued appetite for credit facilities due to eroding profits,” said Tiffany Odugwe, a macro-research analyst at Cardinal Stone Partners, an investment bank, in response to questions. 

Nigeria is well on the brink of an economic recession, and “Falling credit to the private sector will undermine economic recovery efforts,” analysts say.

Though hamstrung by a crippling environment and burdensome government policies for decades, the private sector is increasingly growing to assume its critical role as the engine of economic growth globally. 

To ensure credit growth to the private sector rebounds to its average of 15 percent in the last decade, “Government must de-risk key sectors to incentivise investments and boost the confidence of banks to lend,” Odugwe said.

“Sectors like agriculture and information technology, among others, are highly risk laden at the moment, due to seasonal and price fluctuations as well as lack of physical collateral.

If government intensifies its drive to create an enabling environment for businesses in these sectors to thrive, banks wouldn’t be as weary as they are right now of lending to them.”

Nigerian banks, which have a total loan portfolio of about N13 trillion, have been reporting higher levels of NPLs in their 2015 results, citing weak economic conditions precipitated by the slump in oil prices.

NPLs in the banking system rose sharply by 78 percent year-on-year to N649.63 billion in 2015, according to a CBN report.

Ratings agencies, Fitch and Moody’s, have downgraded the credit ratings of several large Nigerian banks because of rising NPLs.

“Most of them are trying to restructure their current loan portfolios,” an investment banker at Afrinvest said by phone, on condition of anonymity. 

“No sector, from manufacturing to the oil sector, is risk free and as a result, banks are extremely cautious in extending loan facilities at the moment,” the investment banker said.

At the end of H2 2015, the CBN said loans to the oil and gas sector accounted for 25 percent of the gross loan portfolio of the Nigerian banking system.

Furthermore, bank credit to the sector rose marginally, by 2.8 percent to N3.31 trillion at the end of December 2015 compared with N3.22 trillion as of June 30, 2015.

“It is expected that credit risk will increase due to threats of further rise in NPLs in the oil and gas sector. The CBN will continue to require banks to strengthen their contingency plans and conduct regular stress tests to mitigate the impact of the crash in oil prices on their balance sheets,” a Central Bank report read.

Analysts say Government must come up with policies that will address the risks in the investment space and review laws that guide the ease of doing business, so that opportunities may open up and risks are curtailed.

“Welfare programmes can be embarked on to boost the purchasing power of people and if demand rises, it will trickle down to the profit margins of consumer goods manufacturers,” an analyst said in response to questions.

The analyst, who spoke on account of anonymity, said programmes like the Conditional Cash Transfer will de-risk the Fast Moving Consumer Goods (FMCG) sector which is grappling with waning demand due to eroding household income.

“If the demand for goods produced is unwavering, it will boost the confidence of people to invest in the FMCG sector,” he said.

In a separate report, the African Development Bank (AfDB) extended a $350 million lifeline to First Bank of Nigeria (FBN) and FSDH Merchant Bank Nigeria to boost lending and economic growth.

According to AfDB, the facility became necessary, given the falling commodity prices, which has caused shortages in foreign currency supply and led to unmet demand for trade finance instruments to support Nigeria’s on-going economic transitions.

“The project will help address critical market demand for trade finance and dollar liquidity by supporting vital economic sectors such as agri-business, chemicals, construction, food processing, manufacturing and non-traditional exports.

It will enhance support to domestic enterprises whose businesses are being hamstrung by shortages in dollar funding.

If fully utilised, counting rollovers, the interventions are expected to facilitate about $2.5 billion of export-import related activity in intermediate and finished goods, raw materials and equipment to support economic growth and tax generation over a 3.5-year period,” a statement from the bank said.