Driving Banks to Improve Private Sector Lending

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The markets keenly await the Central Bank of Nigeria’s planned framework seeking to boost banks’ lending to the real sector, albeit at the expense of banks’ investment in government securities, writes James Emejo

The market was last week jolted once more by the announcement from the CBN that it planned to limit the exposure of deposit money banks (DMBs) to government securities in an effort to redirect their lending focus to the private sector.

Apparently unimpressed and frustrated by levels of economic and loan growth as well as previous policy measures undertaken to woo the banking industry to lend to the real sector, which is adjusted to be critical to the development of the economy, particularly the diversification efforts of the current administration, the CBN Governor, Mr. Godwin Emefiele, had stressed the need to cut banks increasing appetite for investing in treasury bills and other government instruments, in a determined intervention to spur the growth of the economy through the small and medium enterprises (SMEs).

Speaking at the end of the two-day Monetary Policy Committee (MPC) meeting in Abuja last week, the CBN boss had expressed the disappointment of the committee over banks’ lukewarm attitude towards lending to the real sector, preferring instead to deploy financing to government securities at the detriment of the economy.

According to Emefiele, the MPC, therefore, issued express orders to the apex bank management to “provide a mechanism for limiting DMBs access to government securities so as to redirect bank’s lending focus to the private sector” as this could boost the much-needed growth in the economy.

The committee stated that the abundant opportunities available to banks for unfettered access to government securities tends to crowd out private sector lending.

The committee’s resolution appears to be understandable after all as every previous attempts to encourage banks to increase credit advance to the private had largely been unheeded.

In July last year, the CBN evolved a credit expansion mechanism to boost lending to the real sector, by promising to refund 100 per cent of cash reserve ratio (CRR) to banks, which are able to demonstrate evidence of increased lending to the private sector, particularly agriculture.

According to reports, the banks practically shunned the CBN offer and continued to relegate private sector lending to the background.

However, Emefiele, who vowed that the CBN will implement MPC’s directive to the letter said the committee particularly expressed concern at the development, whereby banks abandoned their key roles of stimulating growth by investing in government instruments at the detriment of the economy, also highlighted some measures to address the situation going forward.

He said: “The truth is that yes, according to our own regulations, there is a particular minimum percentage of treasury bills or government securities that the banks must invest in, in order to remain liquid, but again we have observed and unfortunately and increasingly so, that the banks, rather than even focusing on granting credit to the private sector, they tend to direct their focus mainly on buying government securities.

“The MPC has frowned at that and has directed the management of the CBN to put in place policies or regulations that would restrict the banks from unlimited access to government securities.

“It is important and expedient that the committee gives this directive to management because this country badly needs growth. For us to achieve growth, those whose primary responsibility that it is to provide credit, who act as intermediaries in providing credit and are called catalysts to credit and growth in the economy must be seen to perform that responsibility.”

“And that rather than perform that responsibility to the private sector that is the engine of growth in the economy, they would be directing liquidity to other sectors of the economy. That is what the MPC frowns at and has, therefore, given the management power to think of what can we do to limit their appetite for just going for government securities rather than directing credit to the private sector of the economy,” he added.

Although the apex bank is yet to produce the anticipated regulatory and legal framework for restricting banks’ investment in government treasury bills and bold, the market has nonetheless, reacted to the development.

In an interview with THISDAY, a treasurer in one of the leading commercial banks, who pleaded to remain anonymous, explained that if the policy is enforced, banks would be forced to change their investment strategy.

According to him, banks may then be compelled to seek opportunities in other investment outlets such as commercial papers.

“Investment in treasury bills and bonds are risk-free and the returns are guaranteed. So, limiting the amount of investible funds would definitely hit the profitability of banks.”

Also, Head of Research and Strategy at FSDH Merchant Bank Limited, Mr. Ayodele Akinwunmi, predicted a situation where there could be a rule directing banks on how to structure their balance.

He told THISDAY that the apex bank could also use moral suasion to achieve its objective of making banks lend to the real sector, just as he highlighted the risks in lending to the real sector.

Akinwunmi said:“The short-term impact of this policy if implemented is that commercial paper market will increase; there would be tendency for banks to rediscount and trading on other papers would increase. But everybody will be happy if interest rate in the economy drops and the risks in the economy reduces.”

Furthermore, analyst at EFG Hermes, Mohamed Abu Basha said though it is not clear how such a restriction would be implemented, “but in all cases, we don’t believe that it would necessarily lead to a pick-up in credit growth given.”

He hinged his argument on the “tight liquidity in the system thanks to the CBN’s tight monetary policy” as well as “banks’ risk aversion due to the poor macroeconomic backdrop.”

On his part, Managing Director, Afrinvest Securities Limited, Mr. Ayodeji Ebo, said going by the move to limit exposure to treasury bills and bonds, banks would not be comfortable with the policy because it undermines their chances of making money.

“So, it is going to be a difficult push for the central bank. The CBN needs to look for a more structural way to boost lending to the real sector. This looks like more of direct control. It is better to adopt moral suasion on this matter,” he noted.

Ebo cited the difficult operating environment as one of the factors discouraging lending to the private sector.

However, aware of banks’ aversion to lending to the private sector, particularly in view of the associated risks, and potential for non-performing loans increase, the CBN further assured that other measures would be announced to limit banks’ losses which may result from lending to the private sector.

Emefiele said: “We do know that banks have often expressed some resistance to increasing credit to the private sector given the past experiences they’ve had about NPLs that result from this.

“And hence, the MPC themselves have also directed management that we should think about administrative, legal and regulatory framework to be put in place to ensure that some of the credit risks that are associated with granting credit risks to the private sector that ultimately result in NPLs should be mitigated such that when banks decide to begin to lend to private sector or increase lending, that the probability that NPLs will rise should be moderated.”

According to him, the MPC also felt that the consumer credit and mortgage credit market must be catalysed in Nigeria. That one of the inhibiting factors to growth is the fact that we have not been able to effectively jump-start the consumer credit and mortgage credit lending in Nigeria.

“And the management of the bank will think of how to put in place regulations that would assist people or banks in ensuring that consumer credit is improved again in Nigeria.

“In different parts of the world, people go to the shops and they should be able to buy things on credit. When you buy those things on credit, what it does is that if you have some liquidity, say about N5 and you want to buy something for N10, what it does is that it improves aggregate demand, when it increases demand that can meet the dormant supply, what you will find is that it will catalyse the economy, it will also catalyse productivity and grow the economy and we can begin see GDP begin to attain the kind of historical level that Nigeria has always been at.

“That we are going to take up, given that the MPC has given management that mandate and we are going to hold very informed and strategic discussions and engagements deposit money banks because they are very important, they are anchored to growth and we will make them understand that they must play this role that is expected of them.”

Further clarifying on the level of bad debts in the banking industry, the CBN boss said, “If you recall, the prudential guideline is that banks should have maximum of 5 per cent in NPLs. I must say at this time it is about 19 per cent on the average which is a significant improvement from where it was a year or two ago.

“About a year or two ago, it was close to 15 to 17 per cent and moderating to 10 per cent I would say is a substantial and significant and encouraging improvement in the level of NPLs.

“And I do think that with the steps that would be taken by the CBN to support the bank through administrative, legal and regulatory framework, that certainly we would see to it that NPLs are brought down so that deposit money banks can be encouraged to go back and begin to lend more aggressively to those sectors that they consider to be risky.”

Emefiele had always insisted that the provision of cheap financing to boost local production of priority goods in critical sectors of the economy remained the key to achieving sustainable growth.

He said, this would reduce reliance on foreign imports, which constitute a drain on the economy as well as help small businesses, which are seen as catalysts to growth, prosper.

Nonetheless, given that stability and confidence remained crucial for the financial system, the proposed regulatory framework on banks’ investment in government securities by the CBN may only seek to strike a balance between banks’ profitability and economic growth.