Deposit money banks (DMBs) in Nigeria have intensified competition to acquire retail and corporate customers following a strategic focus around loan refinancing.
The banks are making reasonable efforts at acquiring the loan liabilities of target prospects from other banks, with an offer for discounted interest rates.
Expectedly, banks making the bold move are majorly those that are reasonably liquid to take such risks for an enhanced customer base. They cut across the tier-1 and tier-2 lenders.
BusinessDay learnt these banks meet both large and small corporates as well as individuals with various categories of existing loans, preferably the soft loans offered to salary earners. Very simply, their targets are the salary accounts of the prospects.
A director in one of the tier-1 banks told BusinessDay on the phone that the strategy is an opportunity for collection and credibility. The director explained that banks target certain names with credibility and also look at the entire value chain of distributors and staff of a company.
The Central Bank of Nigeria’s latest publication of the applicable rates for each of the DMBs as at June 22, 2018 shows that banks charge between 4.20 percent and 20.5 percent for prime lending and between 20.4 percent and 41.5 percent for max lending.
Total value of credit allocated to the private sector of the economy by the banks stood at N15.13 trillion as at the fourth quarter (Q4) 2018, a decline of N455 billion from N15.58 trillion at the end of the third quarter (Q3) 2018, according to the National Bureau of Statistics (NBS).
The banks that are liquid target customers of cash-strapped banks with incentives in form of lower interest rates and afterwards, restructure the loans.
“This is a form of loan refinancing. It makes a business sense where customers have loans with high interest rates which they contracted in periods of high interest rates,” said Taiwo Oyedele, head, tax and regulatory services, PwC.
The CBN has kept its monetary policy rate (MPR) at 14 percent since July 2016, when it lifted the rate by 200 bps. The regulator has also kept unchanged the liquidity ratio at 30 percent, cash reserve ratio at 22.5 percent and +200/-500 basis point asymmetric corridor around the MPR.
“Now that rates are trending downward, a bank can refinance such loans at a lower rate and still make money in the process. Overall, it is a reflection of the intense competition in the sector which is good for customers and the economy in general,” Oyedele said.
The aggressive loan push by banks has further intensified following the continued drop in Nigerian Treasury Bills yield.
Ayodele Akinwunmi, head of research, FSDH Merchant Bank Limited, said banks offering lower rates to customers is a market strategy.
On the implication of the development on the banking industry, Akinwunmi said if the rates continue to drop, interest income of the banking sector will drop. Income of banks consists of about 70 percent of their loan.
In the week ended March 1, increased foreign investor appetite in emerging markets, sustained low frequency of Open Market Operations (OMO) auctions and buoyant liquidity compressed yields by 122bps W-o-W across tenors in the Treasury Bills (“T-Bills”) secondary market to 13.0 percent, from 14.2 percent the previous week, Afrinvest Securities Limited said in a report.
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