Don’t pamper banks to make loans

The Bankers’ Committee in collaboration with the Central Bank of Nigeria recently put in place a credit risk protection clause that should be put in its proper context. It is a banking industry-wide shield against loan default in the wake of the CBN directive requiring each deposit money bank (DMB) to achieve a loan-to-deposit ratio (LDR) of 60 per cent by end-September 2019. One reason adduced for introducing the protection clause is to prevent any spike in the level of non-performing loans (NPLs), which stood at 9.36 per cent in August 2019. The CBN Deputy Governor (Financial Sector Surveillance) explained that the high incidence of NPLs is attributable to the willful refusal of some bank customers to repay loans.

Proponents of the protection clause profess that recalcitrant borrowers are wont to abandon particular banks after they obtain loans. Such conduct frustrates the hedge against loan default usually given to the creditor bank whereby the borrower puts in pledge his total deposits (presumably including collaterals) in the particular bank for the purpose of repaying any mature loan.However, the new credit risk protection clause makes a loan contracted in an individual bank open to be fully repaid on maturity with the borrower’s deposits and assets across the banking industry. Other reasons that necessitated the adoption of the new measure were the prospects of wiping out deep-rooted risk aversion among DMBs and whetting banks’ appetite to lend and so provide adequate credit facilities to the productive sectors of the economy.

The full extent of a bank customer’s deposits and assets will be gleaned (according to the draft CBN prudential guidelines slated to take effect on 1/1/2020) from “the Bank Verification Number (BVN) of individual borrowers and directors of corporate borrowers, Tax Identification Number (TIN) of corporate borrowers and information on entities related to the borrowers.” On the strength of such information, any bank customers taking a government loan would agree not to default.

Clearly, CBN has gone to great lengths to pamper members of the Bankers’ Committee to wean them from continued freeloading on apex bank bounty and make DMBs to perform their normal function of lending to their customers. Nonetheless, it is quite superficial. 

To some extent, the credit risk protection clause merely compensates DMBs for the reduction of remunerable daily placement from up to N7.5 billion to about N2 billion via the CBN Standing Deposit Facility (SDF) window at 8.5 per cent interest rate. The placement used to fetch 10 per cent interest rate for a long while. The remuneration of SDF placement is straight subsidy using inflationary fiat printed naira funds. Also there remains the multiple segment foreign exchange market, which provides ample avenues for DMBs to profiteer at the expense of the economy. So banks still really do not have cause to actively seek to lend.

Anyway, now that CBN wants DMBs to make loans, the protection clause raises at least three reservations. One, whether the measure took effect at the close of the Bankers’ Committee meeting on August 26, 2019 or will come into force next January as the draft CBN Prudential Guidelines indicate, the Bankers’ Committee in cahoot with CBN has appropriated lawmaking and enforcement powers by voiding the limited risk exposure under limited liability companies. Two, the generalisation that NPLs arise from willful refusal of borrowers to repay loans is incredible. That is evident from the earlier noted implicit loophole that some bank borrowers could default on non-government loans, which finds expression in the non-performing loan limit set in the Prudential Guidelines. The 2010 Prudential Guidelines and the draft review both contain “all banks are to ensure that the level of NPLs in relation to gross loans does not exceed five per cent.”

Indeed, the level of NPLs has consistently exceeded the set limit every year. The CBN Annual Report 2018 puts NPLs at 11.4 per cent in 2018, down from 14.8 per cent in 2017. The following excerpt from that report succinctly says, “Banking system capacity to finance economic activities, measured by the ratio of aggregate credit to GDP, was 21.6 per cent compared with 22.8 per cent in 2017. Also credit to the core private sector as a proportion of GDP fell to 17.8 per cent from 19.6 per cent in 2017…Furthermore, the industry average liquidly ratio was 51.7 per cent at end-December 2018 compared with 45.6 per cent at end-December 2017 and was above the regulatory minimum of 30.0 per cent by 21.7 percentage points.” Similarly, growth in bank credit to the private sector was 1.96 per cent in 2018 as against the target of 8.49 per cent. Ceteris paribus, the 60 per cent LDR would result in the creation of N1 trillion or less than additional 0.7 per cent of GDP. That increase is a far cry from what the economy requires.

Three, the major factor responsible for the high NPLs and low aggregate credit volume, which the CBN and the Bankers’ Committee conveniently overlooked, is the country’s very high lending rates. For many decades, prime and maximum lending rates taken together have remained between 15 per cent and 30 per cent. The CBN monetary policy rate (MPR)-linked standing lending facility rate stood at 16 per cent from July 2016 till March 2019. Even the Federal Government cites the very high domestic lending rates as reason for contracting external loans. Schematically, high lending rates arise from high MPR, which is caused by high inflation that is in turn stoked by excessive fiscal deficits that happen to be unbudgeted and CBN-induced.

The presidency should ponder and accept blame for the depressing indicators earlier noted. They are the aggravated symptoms of a disease contracted by an economy that has been subjected to long years of excessive fiscal deficits. For Nigeria, the excessive fiscal deficits have been unbudgeted but resulted from the political leaderships’ (read Presidency’s) veneration and improper withholding of Federation Account dollar allocations only to replace them with apex bank prorata fiat printed naira funds for budgetary spending by the tiers of government. These unbudgeted fiscal deficits would have disappeared under the CBN’s 14/8/2007 Strategic Naira Reform Agenda proposal… But unfortunately, the presidency suspended the implantation of the proposal. The proposed reform frequently advocated here would have been the first step towards operating a single forex market in the country.

Instructively and for the education of the presidency, contrary to what the CBN would like government and the public to believe, the European Central Bank (ECB) has “defined price stability as inflation of under 2%…the pursuit of price stability…aims to maintain inflation rates below, but close to 2% over the medium term.” For Nigeria, the fiscal deficit ceiling of 3% of GDP contained in the annual Appropriation Act defines the upper limit of “monetary and price stability” mandate set in the CBN Act 2007 as inflation of under 3%. The fiscal and monetary authorities should abide by the provisions of both Acts forthwith.

This newspaper has repeatedly noted that the first essential step towards national economic turnaround is the proper management of available resources under untrammelled single forex market regime. That would end the unbudgeted excessive fiscal deficits, bring about low inflation and sprout budget surpluses. Generally, the ability to repay loans by businesses, big and small, is made brighter by how lower the interest rate is. Such conducive environment would push NPLs below the set limit just as, without pampering the DMBs, aggregate credit for funding the interdependent sectors of the economy would soar on account of prevailing internationally competitive interest rates. As a result, there would be massive employment and very rapid growth. In the main, it should not be too difficult for monetary policy drivers to follow this organic path for the purpose of recording remarkable growth.