Central Bank of Nigeria (CBN)’s new guidelines is gradually paying off as Banks recorded double digit growth in loans, but the current macroeconomic conditions could force them to turn off the tap on lending.
A glimpse the chart below shows total loans and advances of 10 largest banks in Africa’s largest economy hit N17.69 trillion as at March 2020, which represents an 11.64 percent increase from N15.85 trillion the previous year.
There was a drop in the figure in 2017 financial year, when lenders packed their money in the fixed markets and refused to lend to the economy, as they took advantage of an attractive yields environment.
While banks are gradually making gains from loans extended to the private sector, a reduction in interest income from short term government securities has undermine gross earnings.
For the first three months through March 2020, they realized N209.62 billion in interest income from short term government securities, a 1.79 percent reduction from N213.35 billion made the previous year.
Recall that the central bank had hiked the minimum Loans to Deposit ratio to 65 percent as well as barred private companies and Pension Fund Administration from the Open Market Operations (OMO).
Read also: Banks’ earnings from e-transactions shrink in Q1 after CBN slashes charges on electronic channels
The new policies sent yields tumbling, but it forced banks to start extending credit to the real sectors of the economy.
Analysts are of the view that forcing banks to lend to risky sectors could balloon Non Performing Loans (NPLs) since these loans could go bad.
Combined interest income from loans and advances increased by 6.51 percent to 6.51 percent to N449.59 billion as at March 2020, from N422.09 billion the previous year.
According to the recently released data on the banking sector for Q4 2019 by the National Bureau of Statistics (NBS), banking sector credit to the economy grew for the second consecutive quarter by 5.8 per quarter on quarter (q/q) in the last quarter (Q4) 2019 to N17.2 trillion, the highest level as far as 2007.
Data gathered by BusinessDay shows total cumulative total loans and advances of the 1o largest lenders increased by 13.53 percent year on year (Y/Y) to N17.15 trillion as at March 2020, the highest in four years.
Analysts say that recent business paralysis caused by lockdown imposed by government so as to contain the coronavirus pandemic result in huge impairment since customers will find it difficult to pay interest on money borrowed.
During an economic downturn, cash flows of companies are usually under pressure, and some of them scale back on expansion plans, just to stay afloat.
“I think for Nigerian banks the opportunity to create risk assets will diminish, and just like any other sector, they will face difficulty,” said Johnson Chukwu managing director and CEO of Cowry Asset Management Limited.
“Noninterest income will be affected as letters of credit have reduced since general level of production has fallen,” said Chukwu.
