‘Why banks cannot lend below 20% on average’

Despite acclaimed improvements across the economy through the year, the sad reality is that the nation’s Deposit Money Banks cannot still lend money for productive activities below an average of 20 per cent.

The revelation made by policy makers is also worrisome based on the assessment that the industry may remain under pressure in the foreseeable future, as the problems that have challenged their operational efficiency are still at large.

Besides, the economy, although out of recession, still faces both internal and external uncertainties like low revenue earnings and poor investment ratings that continue to impact on debt pricing, among others.

The retiring member of the Monetary Policy Committee (MPC) and Deputy Governor of the Central bank of Nigeria (CBN), Alhaji Suleiman Barau, said that of the factors limiting banks, power and energy have not shown significant turnaround and would continue to feed into banks’ pricing model.

He said the banking sector has been challenged by a number of factors like the prudential regulations, the benchmark interest rate at 14 per cent, which is still below the current inflation rate by two per cent, while Non-Performing Loans (NPLs) are on the rise.

“The condition in the banking sector is a little bit complex and somehow difficult to address by the conventional monetary policy tools. NPLs are significantly high and above the prudential limit, while liquidity condition, on the other hand, reveals a surfeit.

“The condition is complicated by weakness in credit growth to the private sector, thereby imposing strain on the foreign exchange market. Imposing additional Cash Reserve Ratio to address the liquidity surfeit would invariably tighten credit condition and complicate the NPLs position.

“The level of infrastructure particularly, energy and power have not shown appreciable improvement. These factors would invariably feed into the credit pricing model, suggesting that average lending rate cannot be lower than 20 per cent.

“It would be extremely hard for Small and Medium Scale Enterprises to operate profitably under such a regime when their internal rate of return could barely exceed 20 per cent. This development would continue to pose considerable risk to private investment in the medium term,” he said in his post-MPC notes assessed by The Guardian.

Corroborating his stance, a renowned economist, Adedoyin Salami, cited the Banking System Stability Review, which noted that the banking sector is struggling to cope with the consequences of a fragile economy.

The sector is shown as “characterised by high levels of liquidity” at approximately 44 per cent compared to regulatory requirement of 30 per cent, but stated that there is no “systemic distress”.

He pointed out that the report revealed that the “financial conditions of the banks remain a concern, especially the small and medium banks – due largely to the adverse external and domestic shocks”.

Noting that the key risk factors to watch include credit default risk, obligor and sector concentration risk and liquidity risk, he canvassed urgent need for policy makers to define a series of pathways to lower inflation; interest rates; banking system stability; and rapid, inclusive and sustainable growth.

The Deputy Governor, Financial System Stability, Dr. Okwu Nnanna, in his assessment of the economy, said downside risks to the growth outlook has continued in the economic structure, impact of flooding in different parts of the country and uncertainty in the recovery of crude oil prices.

He also pointed to the financial conditions, which remain fragile due to provisioning for foreign exchange interventions and open market operations, rising average interbank and open buy back market rates.

Nnanna expressed delight for the improving economic indices, but expressed worry that fiscal space to implement the Economic Recovery and Growth Plan (ERGP) remained delicate as the recovery in crude oil prices is susceptible to the anticipated effect of huge investment in shale oil production.

“I remain positive that that the recently launched tax amnesty programme under the Voluntary Asset and Income Declaration Scheme (VAIDS) would scale-up tax revenue and build buffers to cushion the impact of oil prices on fiscal operations,” he said.

Another member of the MPC, Abdul-Ganiyu Garba, had opted for rate cut of 50 basis points to 13.5 per cent, as a first step on the paths to low inflation, which he assessed as conducive to growth, financial system stability and fiscal prudence.

He opted for the rate reduction as he described the macroeconomic challenge as overwhelming, noting that the tentative exit from technical recession was driven by oil and a long way from recovery when compared to 2014
growth level.

According to him, there are unresolved issues like a forward looking medium to long term strategic macroeconomic management framework for Nigeria, as the context for policy analysis and choice.

There is also continuing malfunctions in the credit market which tends to allocate credit to sectors with traditionally high NPLs, low output and employment elasticities, as well as a tendency to restrict access and to charge maximum rates on sectors and economic agents with traditionally lower NPLs and higher output and employment opportunities.

Mr Dahiru Hassan Balami also noted that unemployment is an important area that requires sound policies of both the monetary and fiscal authorities, to reduce the number and spur the much-needed growth in the economy.

He said CBN has a responsibility to assist in reversing the situation through putting in policies that would facilitate or support economic growth.

Balami affirmed that there is need to intervene in various sectors of the economy that have a high propensity to generate employment like agriculture, small and medium scale entrepreneurship and establishment of Silicon Valley centres.

He reiterated that addressing the issue of power by guaranteeing at least six hours a day of constant and adequate voltage power, would go a long way in assisting the private sector.

“Policy makers practically want low interest rates so as to make credit available to economic agents. This means that Deposit Money Banks should be encouraged to direct credit to sectors with high job generation ability.

“The Central Bank should design an incentive scheme that would encourage banks to lend direct to job creation areas such as agriculture. I wait for more clarity on the direction of the economy, with the hope that the fiscal side would play its role in stimulating growth through the implementation of the 2017 budget and putting money into the hands of the various consumers, to stimulate consumption and demand,” he added.