There’ll be more lending opportunities coming the way of businesses and individuals next year after the CBN disclosed plans to direct banks to lend a minimum of 70 percent of their deposits by 2020, but a stuttering economy is threatening to scupper broader long-term gains.
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A sleepy economy that is stuck in a low growth cycle, susceptible to inconsistent government policies and still has to contend with rising poverty and a gaping infrastructural deficit, looms large as a deterrent for borrowers and increases the chances of bad loans for the banks on a lending splurge.
The Nigerian Central Bank is not the only one in Africa that has tinkered with interest rates which surged along with inflation rate after the global commodity crash in 2016 that exposed resource-reliant African countries.
The Central bank of Kenya did tinker with lending policies in 2016 when it capped interest rates chargeable by banks at no more than 4 percent of the base interest rate.
The cap was intended to address poor affordability and availability of credit to working Kenyans and was popular politically.
But in October 2019, the president bemoaned its unintended consequences of reducing credit to the private sector, damaging economic growth and weakening the effectiveness of monetary policy, and refused to assent its renewal.
On the evidence of Kenya, forcing banks to lend may create unintended consequences in the long run if economic fundamentals stay the same.
“Nigeria’s economic challenges are why the banks were not willing to lend in the first place. If there were quality opportunities to grow their loan books, they won’t need the CBN to force them to grow their assets and make more money,” a senior banking source told BusinessDay.
“The CBN’s aggressive lending push will surely create an initial bounce, but the question is how sustainable is that in the long run,” the source said.
Some bank CEOs interviewed by BusinessDay did admit to the risk of higher non-performing loans as they scramble, under the threat of steep punishments by the CBN, to lend in a risky economy.
The risks facing the economy no longer matter as much, as banks must now open the taps on lending or face backlash from a central bank desperate to boost lending to revive an ailing economy.
While three successive months of double-digit increases in credit to the private sector shows the CBN’s Loan to Deposit (LDR) policy has created an initial bounce, it will take robust economic growth to change Nigeria’s fortunes. Achieving robust economic growth will require the implementation of badly-needed fiscal reforms.
“The economy must offer the promise of growth for a firm to consider taking a loan to invest in expanding its business because that’s why firms take loans,” a banking source who did not want to be named to speak freely said.
“If the economy is not expanding, where is the incentive to borrow? It doesn’t matter whether the loan is cheap or not, if you have no use for it, then you can’t accept it,” one of the bank CEOs said on condition of anonymity so as not to be perceived as challenging the CBN.
A former deputy governor at the Central Bank said “If the CBN is forcing the banks to lend while ignoring the economic fundamentals then there is a risk of accumulating bad loans in the future.
“It’s true that some firms are doing well despite the economic challenges and might need money for expansion particularly in the tech space but how many of such firms can absorb and afford the sheer amount of cash the CBN is forcing the banks to push out in loans.
“Badly-needed economic reforms have stalled and there’s a limit to what the CBN can do without those reforms,” the former CBN deputy governor who did not want to be named to speak freely said.
“I think it’s the missing puzzle in the push to revive the economy,” the source said.
The International Monetary Fund (IMF) said last week that the balance sheets of banks would be weak due to the CBN’s aggressive lending push by raising the bar on Loan to Deposit ratios.
Days after the IMF warning, global credit rating agency, Moody’s, downgraded Nigeria’s credit rating along with that of the banks, slapping a negative outlook on both.
Raising the loan to deposit ratio (LDR) of banks to 70 percent will make it the third such increase since July. The CBN had previously directed banks to lend at least 60 percent of their deposits before the end of September or face sanctions, before returning yet again in October to disclose it wanted banks to achieve a 65 percent LDR by the end of December.
The impact has been telling, with businesses and individuals benefiting from a scramble by the banks to lend.
The Monetary Policy Committee (MPC) in November noted an increase of N1.17 trillion in absolute gross credit between end-May and end-October, which it attributed to the adjusted LDR for the deposit money banks.
Manufacturing was the largest beneficiary, accounting for N460 billion of the increase. Consumer loans provided another N360 billion of the total
While the impact of the CBN’s push for aggressive lending has boosted credit to the private sector, it has not stopped eliciting worries over the possibility of rising bad loans.
The Non-Performing Loan (NPL) ratio in the banking system fell to 6.6 percent as at end-October, the first time it has fallen within single digits since 2015.
While on a downward trend, it remains above the CBN’s prudential benchmark of 5 percent.
“Some analysts argue that the ratio will deteriorate again as a result of the rise in the minimum LDR,” FBN Quest analysts said in a note to clients December 10.
“Another argument is that the banks should be able to develop their credit skills as they boost their loan books.”
Nigeria’s banks are some of the most reluctant lenders in major emerging markets, with an average loan-to-deposit ratio below 60 percent before the CBN’s intervention.
That compares with 78% across Africa, according to data compiled by Bloomberg. It’s above 90% in South Africa and about 76% in Kenya.
“Subdued economic activity and high-yielding government securities give lenders a good reason to stay away from lending to the private sector,” a former bank CEO said on condition of anonymity.
“With lower yields, the distraction of government securities is fading but the main challenges to economic growth remain and that’s where the focus should be,” the source said.
