CBN adopts new measure to tackle loan default, rising NPLs

In a move to tackle issues of loan default and rising Non-Performing Loans (NPLs) in the banking industry, the Central Bank of Nigeria (CBN) has announced an introduction of a credit protection clause that would be attached to offer letters of banks going forward.

Besides, the CBN in collaboration with the Lagos State government plans to develop adjoining areas of the national theatre as well as provide support to the creative industry.

According to the CBN, the credit protection clause would authorise the bank to repay loans from assets of the defaulters across the industry in the case of default.

The CBN recently pushed commercial banks into a tight corner with a new lending policy. The apex bank in the new lending policy, set at least 60 per cent minimum loan-to-deposit ratio (LDR) for banks in order to boost the economy. The CBN has mandated commercial banks to lend to the real sector or face stiff sanctions.

To avoid an NPL increase that may arise from the new lending policy, the apex bank yesterday introduced a measure that would ensure that banks have a framework that would serve as a guide when lending in the sector.

Specifically, the Director Governor, Financial System Stability, Aisha Ahmad, while addressing reporters at the end of the Bankers Committee Meeting held in Lagos yesterday, said the new measure is expected to increase the appetite of banks to provide credit to SMEs, the retail segment with confidence to boost the economy.

“We are looking at the factors that are currently affecting banks’ willingness to lend. This is going to be like a credit protection clause. It will contain the BVM details of the customer and a commitment by the customer that is taking the loan. You will agree to repay the loan and that you also agree that should you default, the deposit you have across the banking industry would be applied towards repaying the loan.

“There are other honest Nigerians that are willing to take loans and repay the loans. However, the few that willfully do not pay are actually preventing others from accessing credit and we are optimistic that this will enable banks to lend more and enable Nigerians to have access to credit especially the SMEs,” Ahmad said.

Furthermore, she also disclosed the apex bank’s plans to revitalise the mortgage sector and improve all value chain the mortgage sector lending.

To this effect, Ahmad explained that the CBN had introduced a mortgage drawback fund, which would help address a high-cost mortgage.

“A lot of mortgages are done at a high double-digit and this would help reward those that have the capacity to repay their loan and it is expected to reduce the cost of a mortgage by half.”

The Director of Banking Supervision at CBN, Ahmad Abdullahi, added that because of the risk aversion in the industry and the need for banks to increase their loan book to 60 per cent, the mechanism was developed to give customers some commitments for repaying.

“Here, all new loans that are coming on board will have a BVN, that would clearly identify the obligor, there would be a clause whereby the borrower would have to sign an agreement that if for any reason there is a default, of that particular loan, the bank has the right to set off with any deposit or any amount that the obligor would have in the industry.”

On his part, the Managing Director of Access Bank Plc, Herbert Wigwe said the bankers’ committee also paid a lot of attention to credit to the creative sector in the areas of individual banks extending credit to individuals in the creative sector, especially in the areas of infrastructure development.

He said preliminary work had started in the bankers’ committee project with Lagos State government on the development of the National theatre, adding that work would commence fully on the project before the end of the year

“Again under pre-approved guidelines that are sufficiently possible for people to borrow and grow IGR because of the impact that this sector has on the economy and employment of young people.

“Furthermore, there is a pilot arrangement that is starting between Lagos State government and bankers’ committee and the whole idea is for us to develop their adjoining areas to the national theatre and provide support to those poor verticals like fashion, music, Nollywood and the creation of IT hub.”