Nigerian lenders tighten credit criteria as default rates worsened in Q4’20

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.

The proportion of secured loan applications approved decreased as lenders try to manage their risk exposure due to the increase in default rate, according to the Credit Conditions Survey Report released recently by the Central Bank of Nigeria (CBN).

“Secured loan performance, measured by default rates, worsened in Q4 2020, while lenders expect default rates in Q1 2021 to remain unchanged,” the CBN said.

The Central Bank expects an increase in loan request for household purchase as well as for corporate credit but bank lending rates and MPR on approved new loan applications is expected to widen for household purchase loan and all firm sizes except for medium PNFC in Q1 2021.

“Changes in spreads between bank lending rates and MPR on approved new loan applications widened for all firm sizes except medium PNFCS in Q4 2020,” it said.

According to the apex bank, the Maximum Loan to Value (LTV) ratios remain unchanged in Q4 2020 and is expected to remain the same in Q1 2021. “Lenders were not willing to lend at low LTV ratios (75% or less) in Q4 2020. However, lenders were willing to lend at high LTV (more than 75%) in Q4 2020 and are willing to lend at high LTV (more than 75%) in Q1 2021.”

The report shows that lenders demanded more collateral requirements from all firm sizes on approved new loan applications in Q4 2020 and lenders expect to demand higher collateral from all firm sizes and individuals in Q1 2021.

Analysis of the survey report by the apex bank shows that lenders reported an increase in the availability of secured credit to households in Q4 2020 relative to the previous quarter. Changing economic outlook and increased market share objectives were major factors responsible for the increase, as cited by the apex bank. Similarly, the availability of secured credit, according to the central bank, is expected to increase in Q1 2021.

“Changing economic outlook and increased market share objectives as the likely contributory factors,” responsible for the increased in the availability of secured loans.

Meanwhile, the increased in the availability of credit did not meet the financial needs of Nigerians as the CBN report shows that loan requests were higher than the approved credit applications.

Read also: CBN continuous pro-growth policies, intervention can pull economy out of recession

According to Ikemesit Effiong, Head of Research at SBM Intelligence says, even though the Central Bank 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 said.

Demand for unsecured credit card lending from households increased in Q4 2020 and is expected to increase in Q1 2021. Similarly, demand for unsecured overdraft/ personal loans from households increased in Q4 2020 and is expected to further increase in Q1 2021, as compiled from the report.

Further breakdown of the reports revealed that households demand for all lending types increased except for buy to let lending. According to the CBN, all lending types to households are expected to increase in Q1 2021. Household demand for consumer loans which increased in Q4 is also expected to increase in Q1 2021. Similarly, demand for mortgage/ remortgaging from households increased in Q4 2020 and is expected to also increase in Q1 2021.

CBN believes 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.”

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 not generating decent operating income, borrowers are losing creditworthiness, cost of living is increasing, alongside increasing unemployment and inflation levels.”

With a second recession in less than five years, battered by the oil price crash brought on by the coronavirus pandemic, Africa’s largest 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.

As Nigeria’s crude oil production fell to a four-year low, gross domestic product contracted by 3.6 per cent in the three months through September, after shrinking by 6.1 percent in the previous quarter, according to official data released by the National Bureau of Statistics (NBS).

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 Central Bank of Nigeria recently introduced a policy that slashed the minimum interest rate banks pay on savings deposits to 1.25 percent from 3.75 percent but the lending rate for individuals and small businesses have continued to increase.

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.

According to analysts, the low interest-rate environment in Nigeria has been a boom for large corporates who are raising capital at cheaper rates compared to banks loans, micro and small businesses, which form the bulk of the firms in the country, are left out.

Large corporates are leveraging the low-interest-rate environment to issue commercial papers at single digits while micro and small businesses, which employ over 80 percent of Nigeria’s labour force, are largely shut out of the opportunity to raise capital at such low rate due to their small size and most times lack a formal structure.