The Central Bank of Nigeria has been advised to stop coercing deposit money banks to keep giving out loans.
Agusto & Co said in its 2020 banking report that forcing DMB’s to grow their borrowing will encourage ‘weaker risk management practices.
The indigenous rating firm said a further slowdown in economic activities or a total lockdown would be crippling for the banking industry.
Predicting a rise in problematic loans, the firm said, “Our expectations are driven by the regulatory-induced growth in the loan book driven by the minimum loan-to-deposit ratio (LDR) policy, which sanctions banks for non-compliance through additional CRR debits. Agusto & Co. believes that banks should not be forced to lend as this may encourage weaker risk management practices.”
While stating that it expects the Nigerian economy to shrink by six per cent in a worst case scenario, the entity said, “A further slowdown in economic activities and a total lockdown may worsen an already bad situation.”
The finance research firm is more troubled by the high rate of loans by commercial lenders that have worsened since they were issued.
Citing CBN data, Agusto and CO notes that 23 per cent of the loans held by Nigerian banks had depreciated from the default stage one to stage two.
“Agusto & Co. believes that the volume of stage two loans is a threat to the Industry’s asset quality and future profitability. Stage two loans primarily comprise exposures with an increase in the associated credit risk compared to when the loan was disbursed.
"The COVID-19 pandemic with its impact on businesses has elicited an increase in the volume of stage two loans," the report reads partly.
The rating company also notes that the loan portfolio of four banks already have more than 23 per cent of its lending classified as stage two loans. The threshold for concern is 23 per cent.
The firm also predicts that the decaying loans could threaten the capital base of the banking industry.
Citing CBN data, it said only seven per cent of stage two loans were planned for by the Nigerian banking industry.
Asides from dealing with the prospect of stage two loans, Nigerian banks are exposed to the troubled oil, gas and power sectors, all of which have dollar components.
Q1 2020 data shows that 26 per cent of the banks’ loans are tied to the foreign-denominated oil and gas industry.
This implies that the loans would swell up as a result of the naira devaluation.
Q1 data also shows that the bad loans held by Nigerian banks increased by 99 per cent.
The CBN had in July 2019 mandated all banks to give out 60 per cent of its deposit as loans.
When the September 30 deadline for compliance reached, N499bn was debited from the cash reserves of the defaulting banks domiciled with the CBN.
The apex bank then increased the percentage of loans to be given out of a commercial bank’s deposit to 65 per cent.
By the end of December, an increased N650bn was taken out of non-complying banks’ cash reserves.
This policy has, according to observers, triggered spikes in the inter-bank lending rate, which in turn affects the interest rate the lenders are forced to add on loans given to the public.