Lenders tighten credit rules, decline customers’ loan requests

The level of credit to businesses and individuals in the first quarter of 2017 declined, as banks strengthened their rules in the midst of rising Non-Performing Loans (NPLs) and recession, despite availability of the funds.

While fallen revenue earnings had hit the economy since 2014, due to oil prices crisis, banks’ exposure to the sector operators turned bad, hitting more than 10 per cent in NPLs as at December 2016.

Consequently, they are operating cautiously and have resorted to increasing and sticking to credit rules, which have deterred lending or ensure that lent funds perform, and that has led to reduced credit profile in the period under review.

On the other hand, rates on the facilities now assumed a wider spread in relation to the fourth quarter of 2016 figures, with prospects of either remaining wide or increase further in the second quarter of 2017, an analysis of Credit Conditions Survey showed.

Specifically, secured lending to households in the review period increased in availability, spurred by anticipation of a brighter economic outlook, tight wholesale funding conditions and changing appetite for risk.

Analyst at Ecobank Nigeria, Kunle Ezuh, attested to the fact that challenging business environment contributed to the high level credit scoring criteria, which he said is a disincentive to lending.

“The escalated level of NPL is a major issue. A lot of banks are now moving to the government securities, which is risk free. This is why you record increased credit to government than to private sector,” he said.

However, due to banks’ stance on tightening the credit scoring criteria, the proportion of loan applications approved in the quarter decreased, and still maintained that the credit scoring criteria would remain tightened in this quarter.

This development has already been forecast to increase further in the second quarter, with tight wholesale funding conditions as the major contributory factor.

Also, there was wide disparity between the value of the loan request and what was actually approved, as maximum loan to value ratios was 75 per cent or less.

Similarly, unsecured lending, like credit cards, personal loans and overdraft rose in the current quarter and was expected to further rise in second quarter.   Due to lenders resolve to tighten the credit scoring criteria for total unsecured loan applications in first quarter of 2017, the proportion of approved total loan applications for households decreased in the quarter.

Spreads on secured and unsecured overdrafts/personal loans on approved new loan applications widened in the current quarter and expected to remain widened in second quarter.

Also, fees and commissions on all approved new loan applications rose for all firm sized businesses except the small businesses in the current quarter. These are also expected to rise in the second quarter.

Consequently, banks experienced lower default rates on credit card and overdrafts/personal lending to households in the current quarter, as well as expect improvement in default rates in the second quarters.