The determined drive by the Central Bank of Nigeria to mandate commercial banks to increase lending to the agriculture, manufacturing, SME sectors of the economy could worsen the quality of assets in the Nigerian banking industry.
Adedayo Bakare, an analyst with Afrinvest, said in a chat with SaharaReporters that non-performing loans in the money lending sector is 10 per cent to 100 per cent above the CBN’s threshold of five per cent.
This, he believes, would only get worse with the apex bank’s insistence that banks should make 65 per cent of their deposit loans to the real sector.
He said, “The CBN threshold is five per cent, but the actual performance is 10 per cent.
“The bad loans in the system are already too much. The CBN is saying you cannot do above five per cent, the industry is doing above 10 per cent.
“It could get worse for banks if they are not careful or relax their risk management.”
In a show of force, the CBN fined 12 banks over N499bn for failing to give out 60 per cent of their deposit as loans by September 30, 2019.
Bakare said the move was not necessarily good for the health of the lenders as the volume of cash they could borrow to customers had been depleted.
Bakare also noted that the commercial lenders are already forced to keep 22.5 per cent of their deposit with the CBN.
He added, “This means the banks can only draw on 77.5 per cent of their deposit on paper which is actually lower in practice.
“For every N100 deposit that bank’s collect from the public, you must keep N22.50 with the CBN and CBN does not give them any interest on that. It is out of N77.50 they must do their lending.
“In practice, it is actually higher than 22.5 per cent. Deposits will fluctuate on a daily basis, when deposits reduce, CBN is not going to give them more money.
“If you are taking an extra N500bn from these banks, it means you are reducing their liquidity.
“They might start relaxing their requirements and taking on more risks, which means there is more potential for loans to go bad.
“Banks will lend more but I don’t think they are going to meet their 65 per cent target.”
Bakare did not completely condemn the CBN’s policy stance but said the market for lending to high risk clients was still weak as credit worthiness remains an issue.
He stated, “The plan is not necessarily bad because every economy requires credit to be able to grow.
“Before banks lend to the real economy, there must be an improvement in terms of the credit worthiness of the people.
“The agric sector which the CBN thinks they want to encourage lending, the farmers are not paying back.
“In a bid to improve the chances that a small business holder will gain access to loans from banks, PMB signed the Secured Transactions in Movable Assets Act, 2017.
“This allows small businesses to use items of value other than buildings.”
Bakare however noted that the act has not been taken advantage of.