• Sunday, July 14, 2024
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Economy at risk as lenders review loan facilities upwards


The Nigerian economy is at risk, following the upward review of existing facilities by banks to customers, to hedge against the negative impact of the recent further tightening of monetary policy measures by the Central Bank of Nigeria (CBN), BusinessDay investigations reveal.

The implication, according to some analysts, is that consumers are in for harder times, as this development and  dwindling revenue to the nation’s coffers, caused by falling oil prices, will further impoverish them.

This will be particularly telling, as purchasing power has been eroded by delayed payment of monthly salaries to local government staff in some states of the federation.

The recent hike in monetary policy measures, typified by increasing Cash Reserve Ratio, (CRR) on private sector deposit from 15 percent to 20 percent, Monetary Policy Rate (MPR), the anchor rate at which the CBN lends money to banks, from 12 to 13 percent, and devaluation of the currency, among others, are said to have engendered a reduction in the liquidity in the banking industry, with the attendant funding cost for banks.

“In view of the above policy changes by the MPC, the bank has been constrained to implement an upward review on the pricing of your naira credit facilities to 26 percent. The new rate will become effective from the 7th of December, 2014.

“Please note that this rate is a special concession. We hope you will reciprocate this gesture through increased business volumes with the bank,” said a letter of review dispatched to customers by one of the banks last month.

An industry  player told BusinessDay at the weekend, that there is no way banks would not embark on upward review of the facilities, “considering the fact that banks seem to be major targets in the ongoing reforms.”

The summary of current deposit and lending rates by banks, released by the CBN last week, showed that demand deposits have an average interest rate 2.4% maximum and minimum of 0.08%. Savings on the other hand, have 3.99% and 3.1% maximum and minimum rates respectively.

However, maximum lending rate stands at 35% for agric and 32% for mortgage , transportation.

Ayodeji Ebo, analyst with Afrinvest Securities limited said, “An increase in the MPR will necessitate a mild recalibration of the Prime Lending Rate (PLR) and Maximum Lending Rate (MLR) of current and prospective loan facilities by DMBs, especially for retail loan facilities.

Most loan facilities advanced in Nigeria are floating rate based, although past trends have shown that the propensity to increase the lending rates (PLR and MLR) are premised on the level of competition within the financial industry. Large corporates maybe be better positioned with a negligible increase in the industry, due to competition, while the Small and Medium Scale Enterprises (SMEs) may bear the brunt.

The foreseeable negative impact on credit may be responsible for the division in the recent meeting of the Monetary Policy Committee, with two members of the 11 member committee registering dissenting views on the increased MPR from 12 to 13 percent.

Abdul-Ganiyu Garba, a member of the committee at the meeting said, “I voted to maintain MPR at 12%. I understand the argument about compensating for country risks to attract portfolio flows. However, I am not convinced by the argument.

“I am more convinced by the medium to long term argument. In any case, the effects of MPR increases are asymmetrical because of the asymmetries in the money market: wholesale borrowers with high interest rate elasticities are unlikely to be affected, while retail sector borrowers with low interest rate elasticities are most likely to be adversely affected.”

Chibuke Uche, another member said, “In my view, the preferable way to do this is to increase CRR on private sector deposits held in Nigerian banks. While tightening money supply will increase interest rates, which will be detrimental to the interest of the productive sectors of our economy.

“Although I support monetary tightening under our current circumstances, I oppose that this be done through increase in MPR.

“This is because I do not believe that we should be involved in formulating policies that will encourage the inflow of short term. Perhaps a more important reason why I have refused to endorse the tightening of monetary policy through the instrument of MPR is the fact that our current MPR is already very high and by far above our inflation rate.

“ Further increasing this will have a negative effect on our already high cost of credit to the real sector.”

Some analysts said at the weekend, that CRR is best used to create a stable demand for reserves consistent with the level of systemic liquidity, adding that while some countries have used high cash reserve ratios mainly to sterilise substantial capital inflows in the context of managed foreign exchange rate regimes (e.g., China and Brazil), most countries keep this ratio low and stable.

They further argue that an increase in the CRR, particularly when it is unremunerated, imposes additional costs on banks, which then get passed on to the economy in the form of wider interest rate spreads. It is estimated that where banks have constant costs per unit of deposit, a 2 percent increase in the level of the CRR adds approximately 0.5 percent to the spread between deposit and lending rates.

To some of the analysts therefore, changes in the ratio should be infrequent and made only when there is a strong reason not to use market-based instruments, such as government/CBN securities and foreign exchange sales.

However, all the members agreed that the interest rates in all segments of the money market, before the last hike, showed further moderation between September and October 2014, reflecting persisting liquidity surfeit in the banking system, with average interbank call rate moderating from 10.96 to 10.81 per cent, while the collaterised Open Buy Back (OBB) rate moderated from 10.76 to 10.48 per cent in the period.

Consequently, they agreed that “both rates hovered around the lower band of the MPR during the period. The Committee, however, noted that the structure of rates at the retail end of the credit market did not significantly reflect banking system liquidity conditions, as both the prime and maximum lending rates remained largely elevated.

The maximum lending rate declined marginally from 25.77 to 25.75 per cent between September and October while the prime lending rate, on the other hand, increased from 16.44 to 16.48 per cent.

To improve the efficiency of monetary policy, the committee, urged the bank to ensure that credit levels reflected liquidity conditions in the banking system.

John Omachonu