Before banks downsize loan portfolio to businesses
Businessmen and intending entrepreneurs should note that the Nigerian economy at present requires every support to rebound fully and ensure improved economic and social welfare of the citizenry.
In the first half of this year, total credit by banks to businesses reduced by N855 billion or 5.7% from N14.9 trillion in the corresponding period of year 2017.
Also, while banks’ credits to businesses were reducing, their investments in government securities – bonds and treasury bills- rose by 2.6% to N6.87 trillion.
What this means is that banks are switching money from the private to the public sector.
By implication, the government is squeezing out the private sector from accessing bank loans and credit facilities.
There are some questions that should be asked at the moment: why are banks reducing credit to the private sector and investing more in government debt instruments?
What are the implications of such developments for the economy? Are there measures that can be taken to redress the situation?
Many reasons are likely to be responsible for banks’ emerging credit service delivery behaviour.
First, banks are business organisations which seek profit and do everything to avoid losses.
With the rising cases of non-performing credits and the resultant losses, banks would like to avoid going in that direction.
Consequently, they are scaling down their loan portfolio either by recalling existing, unexpired facilities or non-renewal of expired ones or even non or lesser approval of new credit lines.
Second, government financial security instruments, which are risk-free, have been enjoying good coupon rates for a long period of time.
Rather than risk their money by granting loans to private businesses, banks feel satisfied leaving them in the hands of the government, knowing that there would be no loss, after all.
The worst that could happen is lower profit than what would have been earned if the money went to private sector businesses.
Third, banks’ current capacity to lend especially given a number of regulatory and environmental issues is constrained.
For instance, banks have to comply with, among other regulatory requirements, Cash Reserve Ratio (CRR) and Capital Adequacy Ratio (CAR).
They also need to pay their deposit insurance premium to Nigeria Deposit Insurance Corporation (NDIC).
All of these reduce the volume of money in the banks for lending.
Even, when a bank reaches its regulatory loan to deposit ratio limit, it cannot legitimately and professionally continue to book more credits.
Fourth, added to the highlighted regulatory issues is poor performance of the Nigerian economy.
It is unarguable that a significant proportion of bad loans in banks is as a result of poor state of the economy and governments’ inability to settle most of its indebtedness to its domestic creditors most of whom borrowed money from banks to execute governments’ projects.
From the foregoing, it is not difficult to appreciate why banks are reluctant to increase loans to private businesses on one hand and increasing their investments in government financial instruments on the other.
Whatever the reasons for the rationalisations are, the truth remains that credit decline in the economy calls for genuine concern.
If this continues, the fearful prospect of sliding back into recession (having just marginally exited from it a few months ago) is real.
This economy needs every investible fund it can mobilise, not only to sustain and expand existing businesses but also the creation and development of new ones.
There are even more implications too. If banks’ credits are frozen or reduced, productivity will be adversely affected.
For example, industrial capacity utilisation will nose-dive to precipitate workers’ disengagements and exacerbate the already bad unemployment situation.
Prices of goods and services will move upwards to worsen the level of poverty in the land.
The outcome of a sustained decline in banks’ credit to the private sector of the economy is evidently frightening and measures must be taken to secure a reversal of the on-going investment switch from private to the public sector.
The real sector of the economy needs to be adequately funded to optimise productivity for the growth and development of the economy.
In the main, the experiences of rising non-performing credits challenge banks to take a closer look at their risk acceptance criteria, with a view to recalibrating same to minimise loses.
Bad loans should not be used as justifiable reasons for banks to stall credit delivery to private businesses that hold the key to the economy.
The Central Bank of Nigeria (CBN) and other regulators in the banking and finance sector can only be encouraged to review the subsisting regulatory demands on banks to identify and resolve constraints to more banks’ credits to the private sector.
In the same vein, the government should make the operating business environment better going forward.
It should settle its domestic creditors to keep alive the financial life-line.
Other bank debtors especially bank directors, should settle their credit commitments forthwith to reduce the amount of non-performing loans.
These will bring more money into the banks and ensure a corresponding capacity to grant more credits to needy private sector businesses.
Sound management dictates that there is a balancing of all options in ventures and gains in order to keep an economy growing.
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