• Friday, May 24, 2024
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Nigerian lenders tighten credit criteria, demand higher collateral amid default fears

Loans

While the availability of credit to households and corporates increased in the second quarter of 2020, not many Nigerians and businesses who applied for loans were able to access credit as lenders tightened their credit criteria and demanded higher collateral.

According to the Credit Conditions Survey Report released on Monday by the Central Bank of Nigeria (CBN), there was an increase in loan request for household purchases as well as for corporate credit but the proportion of loan applications approved by Nigerian lenders decreased as lenders try to manage their risk exposure.

“Lenders’ resolve to tighten the credit scoring criterion decreased the proportion of approved unsecured loan applications in Q2 2020,” the CBN said. The Q2 credit report by the apex bank shows that lenders reported increased demand for corporate credit from all firm sizes in the three months to June and expect demand to rise further in Q3 2020.

Ikemesit Effiong, head of research at SBM Intelligence, says even though the CBN has given lenders the directive to give out loans, they have to hedge their risk to ensure that they do not erode their profits.
“The task of determining who more credit is worthy has become significantly challenging for these financial institutions,” Effiong says. The significant factor that influenced the demand for lending in the review period, according to the CBN, is the increase in inventory finance. Similarly, the CBN said it expected inventory finance and capital investment to drive demand in Q3 2020.

The CBN believed that the increase in loan demand was “driven by changing sector-specific risks, changing economic conditions, changing appetite for risk, tight wholesale funding condition and market share objectives.”

On the default rate performance of both the secured and unsecured loan to households, the CBN said its survey result showed it improved in Q2, but was expected to deteriorate in Q3 2020.

“More collateral requirements were demanded from all firm sizes on approved new loan applications in Q2 2020 and lenders expect to demand higher collateral from all firm sizes in the Q3 2020,” the apex bank said.

According to Wale Olusi, head of research, United Capital, the impact of Covid-19 pandemic has worsened risk and uncertainties in the macro environment and as a result “businesses are not generating decent operating income, borrowers are losing creditworthiness, cost of living is increasing, alongside increasing unemployment and inflation levels.”

With the first contraction in three years at -6.1 percent in the second quarter of 2020, the Nigerian economy can now be best described as one that is stagflated.

The condition, which is described by slow, declining or contracting economic growth and relatively high unemployment, or economic stagnation, which is at the same time accompanied by rising prices (i.e. inflation) tips Nigeria into top six most miserable countries globally.

Nigeria’s current economic position means deeper dwindling of consumers’ purchasing power, which implies that incomes of many Nigerians can only buy less of their usual consumption basket, a situation of the poor getting poorer in real terms, and the middle class getting thin out.

Meanwhile, the CBN recently introduced a policy that slashed the minimum interest rate banks pay on savings deposits to 1.25 percent from 3.75 percent.

While banks are expected to be the biggest beneficiary of the rate reduction as it boosts their profitability, Nigerian households and corporates are going to be negatively hit as the policy does not translate to a low cost of credit for the ordinary Nigerians and MSMEs who are still accessing bank loans at a double interest rate.