BVN as Game-changer for Improved Lending to Real Sector

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The BVN 2.0 may prove to be the magic wand in CBN’s numerous measures aimed at encouraging the commercial banks to provide credit to the real sector, writes James Emejo

There is no gain saying the fact that the Central Bank of Nigeria (CBN) had undertaken various steps to woo deposit money banks (DMBs) to lend to the private sector, although some of these interventions have had limited success.

The apex bank, among other initiatives, had promised to free up some funds from the banks’ cash reserve requirements (CRR) should they improve on lending to the real sector, particularly agriculture and small and medium enterprises (SMEs).

CBN Governor, Mr. Godwin Emefiele, had severally highlighted the role of banks in economic development, pointing out that remained their primary duty to deploy credit to key sectors of the economy to stimulate growth and employment generation.

The CBN also recently introduced new regulations to cap banks intervention in securities, particularly treasury bills and federal government bonds, urging them to redirect support to the real sector.

However, despite these initiatives, lending to private sector had remained more or less a flash in the pan when compared with existing funding gaps.

One of the reasons advanced by the banks for not lending to the real sector, particularly agriculture, which is even key to the diversification objectives of the present administration, had been the inherent risks associated with the sector.

Even though some of these enterprises require long-term credit, the financial institutions remained averse to that, often preferring short-term funding for quick return, given their profit orientation.

A major concern on the part of the banks was also the alarming rate of loan default, which the banking industry has had to grapple with the recent scenarios, where most of loans to oil and gas as well as power projects, had become bad debts, giving room for renegotiation. This lends credence to banks’ apathy for lending.

But, in a twist last week, the CBN in agreement with the Bankers’ Committee evolved yet another innovative measure to douse banks’ apathy for lending.

Both had agreed to a plan to create a credit risk clause for consumer lending, which is aimed at making it difficult for habitual loan defaulters to operate.

The landmark initiative, welcomed by stakeholders, is a watershed, allowing a lender to be able to recover its loan to a defaulter from its assets domiciled in another bank.

Stakeholders have described the initiative, which was code-named BVN 2.0 as capable of returning sanity in the financial sector as well as enhancing consumer credit.

CBN Deputy Governor, Financial System Stability, Mrs. Aisha Ahmad, at the end of the 345th Bankers’ Committee meeting, where the new lending framework was hatched, pointed out that the initiative would aid economic growth.

According to her, the apex bank understood the banks’ reluctance to increase credit to SMEs, retail, and mortgage sectors because of customers that had either willfully or otherwise, refused to repay their loans.

The CBN deputy governor said:”And so we have come up with a new clause that we will be including in the offer letters that we will be granting going forward,” she said, adding: “It is important to also remind us of the pronouncement we made to banks that by September 30 of this year, we should have grown the loan deposit ratio to 60 per cent for those that were below and by the time we made this pronouncement the industry was at around 57 per cent.”

“Basically, it would contain the Bank Verification Number (BVN) details of the customers and the Tax Identification Number (TIN) of the customers and more or less, it will be a commitment by the customers taking the loan from government. In taking the loan, you would agree that you would not default.”

But Ahmad also pointed out that the initiative was not entirely uncommon because banks already have rights of set-off within a bank if a customer takes a loan from it.

She said:”If you take a loan from a bank, the bank normally has a clause to repay your loan from all the assets you have in banks, so this is just extending it across the industry.

“We think that there are honest Nigerians out there that are ready to take loans and repay their loans, however, the few that willfully do not pay are actually affecting others to have access to this credit.”

She added that the new clause would enable the banks to lend more with more confidence and enable more Nigerians, in particular those in the MSM’s retail sector to get access.

Although, the announcement may have been unexpected at this period, Emefiele had pointed to a possibility of future actions by the apex bank to push the banks to advance loans to sectors hitherto neglected.

After the Monetary Policy Committee (MPC) meeting in May, the CBN governor had observed banks’ aversion to lending to the private sector, particularly in view of the associated risks, and potential for non-performing loans increase.

He had assured that other measures would be announced to limit banks’ losses, which may result from lending to the private sector.

Emefiele had 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 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.”

Nevertheless, Managing Director/ Chief Executive Officer Guaranty Trust Bank, Mr. Segun Agbaje, said efforts were being intensified to make the economy to push retail and consumer lending.

According to him, banks have started giving advance to salary earners and short term salary advances, but one of the things the Central Bank wants to promote is consumer credit, where you start to get loans to buy cars, where supermarkets start to extend credits and an incentive to help the banks.

President, Chartered Institute of Bankers (CIBN), Mr. Uche Olowu, told THISDAY that the move was a welcome development, stressing that it would bring sanity to the nation’s lending space.

He said: “If you owe a bank, you should pay and if there is a problem, they can restructure the loan to suit those situations. Some have the ability, but not the willingness to pay and that is what this process would check.”

Similarly, an analyst at Ecobank Nigeria Limited, Mr. Kunle Ezun, commended the initiative, but urged the CBN and banks to ensure that the policy is properly structured before its implementation.

According to him, the economy is grown by SME and when SMEs have access to credit ultimately it can help drive economic growth. The loopholes initiative should be supported.”

Also, Vice President, Nigeria Agri-business Group/Chairman, Best Foods, Dr. Emmanuel Ejewere, though expressed support for the initiative by the CBN and the bankers, nevertheless, expressed some reservations.

He said:”For that kind of situation to happen, it takes away the right of two individuals to enter into contract. When you enter into a contract, the contract becomes lopsided when one party came go beyond the contract and the other party has no recourse.

“An example is that you borrow money from the bank and the bank did not give you money when they were supposed to give it to you and your transaction was delayed because of the inefficiency of the bank. Now, the time comes that you are unable to meet your obligations under it. The bank has now been given the rights to go to your other bank accounts- that is one-sided and that is my worry.”

He said:”While I know that people who go into contracts must keep to their obligations, but again, the banking in Nigeria is not a perfect organisation, they have been known to do these kinds of irresponsible acts and therefore, I think that it is lopsided.”

Further explaining the workability of the new lending process, CBN Director, Banking Supervision Department, Mr. Ahmed Abdullahi, said the new clause had to be introduced to stem banks’ risk aversion and encourage them to increase their loan books to fulfill the apex bank’s LDR of 60 per cent.

He said:”A main clause has now been developed in the system whereby all new loans that are coming on board have to have a BVN that would clearly identify the individual.

“Secondly, that there would be a clause whereby the borrower would have to sign an agreement that if for any reason that there is default of that particular loan, the bank has the right to set off the amount available in the industry.”