The
first is the finding that, “more collateral requirements were demanded from all
firm sizes on approved new loan application in Q1 2018. Similarly, lenders will
demand for more collateral from all firm sizes in the next quarter.” Banks’
demand for more collateral will certainly adversely affect granting of credits
to individuals and firms in the economy with consequences for economic/business
activities in the economy.
As is
well known in inability of prospective borrowers to provide acceptable
collateral has always been a major hindrance to accessing credit facilities
from banks, especially as the law (Section 20(2) BOFIA, 1991, as amended)
requires loans of N50,000.00 and above to be collaterised. It can easily be
imagined that the increased demand for collateral may not be unconnected with
the inclement, uncertain and risky business and social environment. Banks,
conscious that the loans they grant are from customers’ deposits which they are
under obligation to repay on demand, are finding ways to hedge against loan
defaults.
The
question that must be asked is, are all the huge non-performing credits banks
have failed to recover, even with the help of Asset Management Corporation of Nigeria (AMCON), not collaterised?
If they are not, that means banks have been contravening section 20(2) of
BOFIA. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
If the loans were collaterised, what role has such collateral played in their
recovery? Yes, collateral is good to be taken but it must not and should not be
seen by banks as the first line of protective guard against loan default. Banks
should therefore, concentrate more on making credits available to businesses
and other persons with proven capacity, from cash-flow and business
sustainability, to repay.
The
second is that, “Overall availability of credit to the corporate sector
increased in Q1 2018 and was expected to increase in Q2 2018.” This goes
against the usual lamentations by corporate organisations about
non-availability or inadequacy of credit in the economy.
CBN’s
indication of not just increased credit availability in Q1 of 2018 but that the
rising trend was expected to continue in Q2 is good news for the economy as
more investible funds are available to be deployed. Perhaps, it was as a result
of this that CBN found that the “Demand for corporate lending from all business
sizes increased in the current quarter and were also expected to increase in
the next quarter.” If the available funds are properly deployed, the economy
would witness improved productivity, employment and poverty reduction, among
other benefits.
The
third concern is that ‘”Demand for secured lending for house purchase decreased
in Q1 2018. However, more lenders expect demand for secured lending to increase
in the next quarter”. This has implications for meeting housing needs of the
citizens. As has been variously pointed out by the government, the need to
provide proper residential accommodation for Nigerians is very acute. Although
CBN has predicted increase in the demand for housing credit in Q2, the
prevailing economic and political environment hardly supports that optimism. Consequently,
given the importance of housing as a basic human need, efforts should be made
to uncover the reasons behind the decrease in demand for personal housing loan
with a view to tackling identified impediment(s). Further, the basis for CBN’s
optimism for increased demand should be identified and evaluated to appreciate
the feasibility of attaining the expected increase. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
The
fourth issue is that: “Total unsecured loan performance to households, as
measured by default rates, deteriorated in Q1 2018 but is expected to improve
in the next quarter.” If the cases of loan default “deteriorated” in Q1, it is
not clear from CBN’s report what would bring about improvement in Q2. No doubt,
high unemployment, high interest rate and foreign exchange rates, non-payment
of debts owed to contractors and salaries of employees by most governments and
high cost of basic human needs, are some of the key causes of households’
credit defaults. Except there will be significant improvement in these and
other similar factors, loan defaults by individuals are likely to increase.
The
fifth is that, “Demand for overdraft/personal loans in Q1 2018 was higher in
comparison with other loan types.” Thus, of all credit types demanded in Q1
2018, overdraft/personal loans, accounted for a higher proportion. This
suggests that businesses and individuals relied more on short-term credit
accommodations to meet their financial commitments. It further suggests that
fund users/investors were not interested in making medium to long-term investments.
http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
This perhaps, justifies CBN’s assertion that the demand for lending in Q1 was
significantly influenced by the increase in inventory. Overdraft finance is
essentially for short-term working capital needs and not for medium or
long-term investments. This country, more than anything, needs more of medium
to long-term investments for meaningful economic growth to be achieved. The
factors that impede such investments should be unearthed and addressed.
The
sixth is that “Changes in spreads between bank rates and MPR on approved new
loan applications for all business sizes widened in Q1 2018, and were expected
to widen for all business sizes except for small businesses in Q2 2018.” This
situation is unhealthy for the survival and growth of businesses and indeed,
contributes to loan default by borrowers. Every effort should be made by CBN
and banks to reduce the spread between bank rates and Monetary Policy Rates
(MPR) in order to reduce financing cost for businesses.
It is
pertinent to highlight CBN’s statements that “the most significant factors that
influenced demand for lending in the reviewed quarter were increase in
inventory finance and capital investment, and they were expected to remain the
main drivers in the next quarter” while “the driving forces for overall
availability of increased credit to corporate sector were brighter economic
outlook, changing sector-specific risks, changing appetite for risk, tight
wholesale funding conditions and market share objectives.”
Finally,
it is commendable that CBN has taken interest in studying credit conditions in
the banking industry as well as in the economy. Credit being a major driver of
economic growth and development, such study is a necessity as it promises not
only to reveal current credit status and what is expected but also the
motivating/causative factors. Beyond these, however, the study should also give
focus to what must be done to better credit delivery services in the system,
how best that can be achieved and the roles and responsibilities of all
concerned stakeholders. The report should highlight lessons that can be learnt
for guidance. CBN should, therefore, endeavour to make the report available to
all those involved in the credit delivery value chain. It is possible that when
such lessons are taken into account, a better credit environment can be
achieved in the interest of the nation’s economy and the well-being of all
citizens. (Guardian)
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