Banks, the challenges and real sector interventions

After the global financial crisis in 2008, central banks across the globe re-invented their policy basket, which saw the emergence of a renewed vigour in unconventional monetary policy. This was in efforts to forestall further economic misfortunes and possibly, augment assessed fiscal policy lapses, which were capable of sustaining or restarting the crisis.

As at Novermber 2016, the Central Bank of Nigeria (CBN) said the apex bank had already recorded actual disbursements for various development financing programmes to the tune of N732.2 billion.

Prior to Nigeria’s fiscal crisis that led to recession, occasioned by oil price shock, the apex bank had remained supportive of the real sector through the interventions.

Globally, the relationship between the financial system and real sector development remains very critical for any economy to realise its potential. Of course, no economy can grow and improve the living standards of its population in the absence of credit to the real sector.

CBN has over the years performed some major development finance functions primarily focused on sustaining the key sectors of the nation’s economy. For example, at its July 2018 Monetary Policy Committee (MPC), the CBN had emphasised the need to increase the flow of credit to the real sector of the economy to consolidate and sustain economic recovery.

But to achieve this objective, it also stated that banks would henceforth be incentivised to direct affordable, long-term credit to the manufacturing, agriculture and other sectors considered as employment and growth stimulating to the economy.

The reality is that in Nigeria, because of the assessed high level of risk in the system, a lot of commercial banks have remained apathetic towards lending and have been largely criticised for this.

This was the backdrop of the guidelines for accessing the Real Sector Support Facility (RSSF) through Cash Reserve Requirements (CRR) and Corporate Bonds (CBs) released by CBN.

CBN Governor, Godwin Emefiele, said the development financing programme was scripted as a special intervention in critical economic segments to minimise the effects of high interest rates on customers and support growth in the economy.

Besides, as interest rate rises in efforts to curtail the galloping inflation in the country, the apex bank said it has always considered small businesses in its decision of development financing, which remains steady at single digit charge.

The issues
The Head of Research at FSDH Merchant Bank Limited, Ayodele Akinwunmi, said the claims that banks are not lending to the private sector contrast with about 60 per cent of the industry earnings, which comes from interest income on lending.

Reiterating his counterclaims, he said that his bank is not only willing, but also capable and waiting for the proposal with clear business idea, particularly from the small and medium enterprises.

“The challenge of risky environment remains large. Banks are interested in lending, but needs the assurance that the borrowed fund would not increase non-performing loan portfolio and impairment charges.

“Despite the availability of the intervention fund, there are limited viable proposals. Besides, companies are afraid too, about the challenging business environment.

“Granted, CBN makes the fund available and does not deal with individual customer, but banks that do it still bear the whole credit risks. If the borrower defaults and bank pays, then banks would be careful,” he said.

One of the major risks for lending presently, is the unending violence, which has swept across the “food producing states” of the country and making agricultural lending to farmers in those areas difficult for banks.

“If you were a bank, would you find it an easy decision to lend to someone in those states, despite the level of trust in the person and the viability of the business?” he queried.

Nigerian banks, at the end of 2017 Bankers Committee retreat, in Lagos, had agreed with the regulator, to evolve a strategy that would bring about risk sharing in the lending of intervention funds, as a way to encourage banks to take the risks.

This followed a radical resolution by the bankers to cut its earlier nine per cent interest rate plan to five per cent for the borrowers of the agriculture enterprise initiative they set up.

Although banks still complain that targeted borrowers are not forthcoming, Emefiele had admitted that the apathy among banks in giving the facilities was about risk-sharing issues, as they do not want to bear the whole of the risks involved alone.

The apex bank said the new drive to disburse the funds to those in need would be facilitated by incentives to banks in the form of forbearance, like the newly approved differential Cash Reserve Ratio and approval for corporate bond issuance.

Interventions
RSSF, the latest of the rescue strategies by CBN, clearly showed the activities that would be covered under the programme, which include Greenfield (new) and expansion of (Brownfield) projects in manufacturing, agriculture and other related sectors.

It, however, stated that emphasis would be placed on Greenfield projects and excluded operators involved in trading activities from accessing its real sector support facility, as the apex bank warned banks that any attempt to “falsify through presentation of projects that do not meet the eligibility criteria/specified terms and conditions shall attract severe penalties”.

The facility shall have minimum tenor of seven years and two years moratorium. Also, participating financial institution (PFI) shall bear the credit risk.

CBN pointed out that under the new guidelines, banks interested in providing credit financing to Greenfield (new) and Brownfield (new/expansion) projects in the real sector (agriculture and manufacturing) may request the release of funds from their CRR to finance the projects, subject to verifiable evidence that the funds shall be directed at the projects approved by the CBN.

But refinancing of existing loans is prohibited under the programme, warning that any attempt to falsify information would also attract severe sanctions.

“This programme involves investments by CBN and the general public in CBs issued by companies subject to the intensified transparency requirements for Triple A-rated entities.

“Such requirements would include publishing through printing of an Information Memorandum spelling out the details of the projects for which the funds are required together with terms and conditions showing that these are long term projects that are employment and growth stimulating,” the apex bank noted.

The new guidelines stressed that priority would be accorded projects with high local content, import substitution, foreign exchange earnings and potential for job creation, while maximum facility shall be N10 billion per project. Facilities are to be administered at an all-in interest rate/charge of nine per cent per annum.

CBN’s Director of Banking Supervision, Ahmed Abdullahi, advised customers to report any bank that charges interest rates above the prescribed maximum of nine percent per annum.

Since 1977, when the Agricultural Credit Guarantee Scheme started, interventions have been broadened to power and aviation sectors, with special arrangements for small businesses, under the Micro Small and Medium Enterprises (MSMEs).

So far, CBN has disbursed more than N393 billion in 490 projects under the Commercial Agriculture Credit Scheme; N56 billion under the Anchor Borrowers Programme; more than N80 billion under the MSME scheme; and more than N240 billion under the Power and Aviation Intervention Fund.

Now, more than 400,000 farmers have so far received support under the Anchor Borrowers Programme (ABP) to cultivate 12 crops, including rice, soya, maize, palm produce, cotton and cassava.

These interventions, which has been increased in recent times due to the challenging economic situation in the country, has also been part of efforts to strengthen import substitution policy, to curb the drain on the nation’s foreign exchange reserves.