Banks Demand More Collateral as Loan Defaults Rise

• Banks Demand More Collateral as Loan Defaults Rise

Banks are demanding more collateral from firms seeking loans as default rates have worsened, a new report from the Central Bank of Nigeria has revealed.

The Credit Conditions Survey Report for the fourth quarter 2016 said the overall availability of credit to the corporate sector increased in the quarter and was expected to further increase in the first quarter of 2017.

It said the major factors contributing to the increase in credit availability were changing sector specific risk, brighter economic outlook, favourable liquidity conditions and tight wholesale funding conditions.

According to the report, availability of credit increased for the large Private Non-Financial Corporations and other financial corporations in the fourth quarter but decreased for the small businesses and the medium PNFCs, and the same trend is expected in the next quarter.

The report said, “Corporate loan performance worsened across all firm sized business in the current quarter as default rates on lending to small, medium and large PNFCs worsened in the current quarter.

“Lenders demanded more collateral requirements from all firm sizes on approved new loan application in Q4 2016. Similarly, lenders expect to demand for more collateral from all firm sizes in the next quarter.”

The CBN said lenders had mixed opinions on default rates in the next quarter, adding that they were of the opinion that default rates for the medium and large PNFCs would improve, while the default rates for the small businesses and other financial corporations would further deteriorate.

It said tenors on new corporate loans deteriorated in the fourth quarter and were expected to further deteriorate in the next quarter.

The report noted that changes in the spread between bank rates and the Monetary Policy Rate on approved new loan applications to the small, medium, large PNFCs and OFCs widened in Q4 2016.

It said, “Following the widened spread, the proportion of loan applications approved for the small and medium-size firms decreased in the current quarter and was expected to increase and decrease, respectively in the next quarter.”

The report said lenders required lower loan covenants from small businesses and medium PNFCs-sized businesses, and stronger loan covenants from large PNFCs and other financial corporations in the current quarter.

It said, “Fees/commissions on approved new loan applications rose for all firm sized business in the current quarter. Fees/commissions were expected to rise further for all firm sized business in the next quarter.

“All firm sized businesses except the small businesses did not benefit from an increase in maximum credit lines on approved new loan application in Q4 2016. Similarly, lenders expect the small businesses and large PNFCs to benefit, while the medium PNFCs and other financial corporations will not benefit from an increase in maximum credit lines on approved new loan application in Q1 2017.”

The report found that demand for corporate lending from small businesses, medium large PNFCs and other financial corporations increased in Q4 2016, adding that it was expected to increase in the next quarter

Lenders were said to have reported that the demand for overdrafts/personal loans and secured lending from small businesses in the quarter was higher in comparison with other business types.

The most significant factors that influenced the demand for lending were the increase in capital investment and inventory finance, and they were expected to remain the main driver in the next quarter, according to the report.