How CBN’s intervention will impact banking operations

Experts in the financial market have said that the decision of the Central Bank of Nigeria (CBN) to grant additional one-year to all intervention loan under moratorium would have a positive impact on banking operations, as they will not need to classify the loans as non-performing.

The experts, however, suggested that the banks must be at the forefront of the regulatory forbearance action as they are expected to provide some form of extension for credit facilities that may have been affected by the impact of covid-19.

The apex bank, on the backdrop of the ongoing global economic crisis over the coronavirus pandemic had announced the reduction of interests rate on its intervention loans from nine per cent to five per cent, as well as, an extension of moratorium from one to two years, to buffer the Nigerian economy.

The CBN Governor, Godwin Emefiele, said that the measures were the bank’s first set of response to the covid-19 pandemic, which has adversely affected businesses in many sectors in Nigeria and across the world

According to the experts, the extension on moratorium would reduce the stress, which would have come from paying off these; loans and the expected interest at a time business are under pressure.

They pointed out that extending the moratorium would enable business managers to re-strategise while the business environment recovers, which would ultimately help to reduce the risk of a possible default on loan repayment.

However, they argued that the interest rate reduction may be tricky to implement because it is a contractual agreement between the banks and its customers.

The Head, FSL Securities Limited, Victor Chiazor, said the CBN regulatory forbearance would allow the banks restructure most of the loans used for businesses that may be affected by the corona virus instead of classifying them as non-performing loans.

“By extending the moratorium, it gives businesses enough time to re-strategize and for the business environment to recover thereby reducing the risk of a possible default on loan repayment

“On its regulatory forbearance, the banks are expected to be in the front line of these action as they are now expected to somehow provide some form of extension for credit facilities that may have been affected by the impact of covid-19.

“This in other words means some credit position that may have been significantly provided for or classified as non-performing may be granted more time to make payment on their loan obligation as a result of the global shock currently being experienced.

“The CBN is also determined to maintain its stance on further strengthening the loan to deposit ratio in a bid to improve credit to the real sector and further drive economic activities as it believes this action remains one of the major catalyst to drive economic growth outside other monetary and fiscal policies,” he said.

The Chief Executive Officer of Cowry Asset Management, Johnson Chukwu said the modalities on interest rate reduction may be more complex to implement because it is a contractual agreement with banks and the customers.

“What CBN is trying to do is to give people some level of confidence. It is a positive action plan to support the economy but the modalities in implementing it is the challenge.”

He suggested that the  the apex bank should reach a risk sharing agreement with banks for them to willingly accept the interest rate reduction and extension of moratorium, which the apex bank is proposing.

‘The modalities on interest rate reduction may be more complex to implement. This is because; it is a contractual agreement with banks and the customers.

“In, as much as the reduction in interest rate payment period will give some relieve to the borrowers, there must be risk sharing agreement for the banks to assist willingly.

The apex bank must reach a risk sharing agreement with banks for them to willingly accept the interest rate reduction and extension of moratorium which the apex bank is proposing.”