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Banks and Collateral for Corporate Loans

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Loan - Investors King
  • Banks and Collateral for Corporate Loans

The Central Bank of Nigeria (CBN) the other day released its Credit Conditions Survey Report (CCSR) for the first quarter (Q1) of 2018. Arising from the CCSR are some issues of interest.

The first is the finding that, “more collateral requirements were demanded from all firm sizes on approved new loan application in Q1 2018. Similarly, lenders will demand for more collateral from all firm sizes in the next quarter.” Banks’ demand for more collateral will certainly adversely affect granting of credits to individuals and firms in the economy with consequences for economic/business activities in the economy. As is well known in inability of prospective borrowers to provide acceptable collateral has always been a major hindrance to accessing credit facilities from banks, especially as the law (Section 20(2) BOFIA, 1991, as amended) requires loans of N50,000.00 and above to be collaterised. It can easily be imagined that the increased demand for collateral may not be unconnected with the inclement, uncertain and risky business and social environment. Banks, conscious that the loans they grant are from customers’ deposits which they are under obligation to repay on demand, are finding ways to hedge against loan defaults.

The question that must be asked is, are all the huge non-performing credits banks have failed to recover, even with the help of Asset Management Corporation of Nigeria (AMCON), not collaterised? If they are not, that means banks have been contravening section 20(2) of BOFIA. If the loans were collaterised, what role has such collateral played in their recovery? Yes, collateral is good to be taken but it must not and should not be seen by banks as the first line of protective guard against loan default. Banks should therefore, concentrate more on making credits available to businesses and other persons with proven capacity, from cash-flow and business sustainability, to repay.

The second is that, “Overall availability of credit to the corporate sector increased in Q1 2018 and was expected to increase in Q2 2018.” This goes against the usual lamentations by corporate organisations about non-availability or inadequacy of credit in the economy. CBN’s indication of not just increased credit availability in Q1 of 2018 but that the rising trend was expected to continue in Q2 is good news for the economy as more investible funds are available to be deployed. Perhaps, it was as a result of this that CBN found that the “Demand for corporate lending from all business sizes increased in the current quarter and were also expected to increase in the next quarter.” If the available funds are properly deployed, the economy would witness improved productivity, employment and poverty reduction, among other benefits.

The third concern is that ‘”Demand for secured lending for house purchase decreased in Q1 2018. However, more lenders expect demand for secured lending to increase in the next quarter”. This has implications for meeting housing needs of the citizens. As has been variously pointed out by the government, the need to provide proper residential accommodation for Nigerians is very acute. Although CBN has predicted increase in the demand for housing credit in Q2, the prevailing economic and political environment hardly supports that optimism. Consequently, given the importance of housing as a basic human need, efforts should be made to uncover the reasons behind the decrease in demand for personal housing loan with a view to tackling identified impediment(s). Further, the basis for CBN’s optimism for increased demand should be identified and evaluated to appreciate the feasibility of attaining the expected increase.

The fourth issue is that: “Total unsecured loan performance to households, as measured by default rates, deteriorated in Q1 2018 but is expected to improve in the next quarter.” If the cases of loan default “deteriorated” in Q1, it is not clear from CBN’s report what would bring about improvement in Q2. No doubt, high unemployment, high interest rate and foreign exchange rates, non-payment of debts owed to contractors and salaries of employees by most governments and high cost of basic human needs, are some of the key causes of households’ credit defaults. Except there will be significant improvement in these and other similar factors, loan defaults by individuals are likely to increase.

The fifth is that, “Demand for overdraft/personal loans in Q1 2018 was higher in comparison with other loan types.” Thus, of all credit types demanded in Q1 2018, overdraft/personal loans, accounted for a higher proportion. This suggests that businesses and individuals relied more on short-term credit accommodations to meet their financial commitments. It further suggests that fund users/investors were not interested in making medium to long-term investments. This perhaps, justifies CBN’s assertion that the demand for lending in Q1 was significantly influenced by the increase in inventory. Overdraft finance is essentially for short-term working capital needs and not for medium or long-term investments. This country, more than anything, needs more of medium to long-term investments for meaningful economic growth to be achieved. The factors that impede such investments should be unearthed and addressed.

The sixth is that “Changes in spreads between bank rates and MPR on approved new loan applications for all business sizes widened in Q1 2018, and were expected to widen for all business sizes except for small businesses in Q2 2018.” This situation is unhealthy for the survival and growth of businesses and indeed, contributes to loan default by borrowers. Every effort should be made by CBN and banks to reduce the spread between bank rates and Monetary Policy Rates (MPR) in order to reduce financing cost for businesses.

It is pertinent to highlight CBN’s statements that “the most significant factors that influenced demand for lending in the reviewed quarter were increase in inventory finance and capital investment, and they were expected to remain the main drivers in the next quarter” while “the driving forces for overall availability of increased credit to corporate sector were brighter economic outlook, changing sector-specific risks, changing appetite for risk, tight wholesale funding conditions and market share objectives.”

Finally, it is commendable that CBN has taken interest in studying credit conditions in the banking industry as well as in the economy. Credit being a major driver of economic growth and development, such study is a necessity as it promises not only to reveal current credit status and what is expected but also the motivating/causative factors. Beyond these, however, the study should also give focus to what must be done to better credit delivery services in the system, how best that can be achieved and the roles and responsibilities of all concerned stakeholders. The report should highlight lessons that can be learnt for guidance. CBN should, therefore, endeavour to make the report available to all those involved in the credit delivery value chain. It is possible that when such lessons are taken into account, a better credit environment can be achieved in the interest of the nation’s economy and the well-being of all citizens.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Crude Oil

Fed’s Decision to Hold Rates Stalls Oil Market, Brent Crude Slips to $82.17

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Oil prices faced a setback on Thursday as the U.S. Federal Reserve’s decision to maintain interest rates dampened investor sentiment.

The Federal Reserve’s announcement on Wednesday indicated a reluctance to initiate an interest rate cut, pushing expectations for policy easing possibly as late as December. This unexpected stance rattled markets already grappling with inflationary pressures and economic uncertainty.

Brent crude, the international benchmark for Nigerian crude oil, saw a drop of 43 cents, or 0.5% to $82.17 a barrel, reflecting cautious investor response to the Fed’s cautious approach.

Similarly, West Texas Intermediate (WTI) crude oil also slipped by 46 cents, or 0.6% to settle at $78.04 per barrel.

Tamas Varga, an analyst at PVM Oil, commented on the Fed’s decision, stating, “In the Fed’s view, this is the price that needs to be paid to achieve a soft landing and avoid recession beyond doubt.”

The central bank’s move to hold rates steady is seen as a measure to balance economic growth and inflation containment.

The Energy Information Administration’s latest data release further exacerbated market concerns, revealing a significant increase in U.S. crude stockpiles, primarily driven by higher imports.

Fuel inventories also exceeded expectations, compounding worries about oversupply in the oil market.

Adding to the downward pressure on oil prices, the International Energy Agency (IEA) issued a bearish report highlighting concerns over potential excess supply in the near future.

The combination of these factors weighed heavily on investor sentiment, contributing to the decline in oil prices observed throughout the trading session.

Meanwhile, geopolitical tensions in the Middle East continued to influence market dynamics, with reports of Iran-allied Houthi militants claiming responsibility for recent attacks on international shipping near Yemen’s Red Sea port of Hodeidah.

These incidents underscored ongoing concerns about potential disruptions to oil supply routes in the region.

As markets digest the Fed’s cautious stance and monitor developments in global economic indicators and geopolitical tensions, oil prices are expected to remain volatile in the near term.

Analysts suggest that future price movements will hinge significantly on economic data releases, policy decisions by major central banks, and developments in geopolitical hotspots affecting oil supply routes.

 

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Crude Oil

Nigerian Oil Loses Ground to Cheaper US and Russian Crude

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Crude oil

Nigeria’s once-thriving oil industry is facing a significant challenge as traditional buyers increasingly turn to more affordable alternatives from the United States and Russia.

This shift has led to France emerging as the leading buyer of Nigerian crude, marking a significant change in the global oil market dynamics.

Top Nigerian crude grades like Bonny Light, Forcados, and Brass have long been favored by refineries in Europe and Asia due to their low sulfur content.

However, the country’s primary customers, including India and China, are now opting for cheaper US and Russian oil.

This trend poses a substantial risk to Nigeria, which relies on oil exports for more than half of its foreign exchange earnings.

Data from BusinessDay reveals a stark decline in India’s purchase of Nigerian crude. In the first quarter of 2024, India bought N1.3 trillion worth of Nigerian oil, a significant drop from the average of N2 trillion purchased between 2018 and 2021.

“Buyers are increasingly turning to cheaper alternatives, raising concerns for the country’s revenue stream,” said Aisha Mohammed, a senior energy analyst at the Lagos-based Centre for Development Studies.

The latest tanker-tracking data monitored by Bloomberg indicates that India is buying more American crude oil as Russian energy flows dwindle amid sanctions.

India’s state-owned oil refiners and leading private companies have increased their imports of US crude, reaching nearly seven million barrels of April-loading US oil. This shift is the largest monthly inflow since last May.

Russian crude flows to India surged following the invasion of Ukraine, making Russia the biggest supplier to the South Asian nation.

However, tighter US sanctions have stranded Russian cargoes, narrowing discounts, and prompting India to ramp up purchases from Saudi Arabia.

“Given the issues faced with importing Sokol in Russia, it’s no surprise that Indian refineries are turning toward US WTI Midland as their light-sweet alternative,” explained Dylan Sim, an analyst at industry consultant FGE.

As a result, France has overtaken the Netherlands to become the biggest buyer of Nigerian crude oil, purchasing products worth N2.5 trillion in the first quarter of 2024.

Spain and India occupied second and fourth positions, with imports valued at N1.72 trillion and N1.3 trillion respectively, as of March 2024.

The sluggish pace of sales for Nigeria’s May supplies highlights the market’s shifting dynamics. Findings show that about 10 cargoes of Nigerian crude for May loading were still available for purchase, indicating a reduced demand.

Rival suppliers such as Azeri Light and West Texas Intermediate have also seen price weaknesses, impacting Nigerian crude demand.

“We’ve got much weaker margins, so Nigeria’s crude demand is taking a hit,” noted James Davis, director of short-term oil market research at FGE.

Sellers seeking premiums over the Dated Brent benchmark have found the European market less receptive, according to Energy Aspects Ltd.

“May cargoes were at a premium that didn’t work that well into Europe, but lower offers have seen volumes move,” said Christopher Haines, EA global crude analyst. “Stronger forward diesel pricing is also helping.”

Some Nigerian grades are being priced more competitively, including Qua Iboe to Asia and Bonny Light to the Mediterranean or East, with the overhang slowly reducing, according to Sparta Commodities.

However, the overall reduced demand could lead to a decrease in revenue from oil exports, a major source of income for the Nigerian government.

“Reduced demand could lead to a decrease in revenue from oil exports, a major source of income for the Nigerian government,” warned Charles Ogbeide, an energy analyst with a Lagos-based investment bank.

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Commodities

Refiners Predict Petrol Prices to Fall to N300/Litre with Adequate Local Crude Supply

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Petrol - Investors King

The pump price of Premium Motor Spirit (PMS), commonly known as petrol, could drop to N300 per litre once local production ramps up significantly, according to operators of modular refineries.

This projection hinges on the provision of sufficient crude oil to domestic refiners, which they say would undercut the exorbitant costs currently imposed by foreign refineries.

Speaking under the aegis of the Crude Oil Refinery Owners Association of Nigeria (CORAN), the refiners stressed the urgency for the government to ensure a steady supply of crude oil to local processing plants.

They argue that the reliance on imported petroleum products has been economically disadvantageous for Nigeria.

Eche Idoko, Publicity Secretary of CORAN, emphasized that the current high costs could be mitigated by boosting local production.

“If we begin to produce PMS in large volumes and ensure adequate crude oil supply, the pump price could be reduced to N300 per litre. This would prevent Nigerians from paying nearly N700 per litre and stop foreign refiners from profiting excessively at our expense,” Idoko stated.

The potential price drop follows the model seen with diesel, which experienced a significant price reduction once the Dangote Petroleum Refinery began its production.

“Diesel prices dropped from N1,700-N1,800 per litre to N1,200 per litre after Dangote started producing. This is a clear indication that local production can drastically reduce costs,” Idoko explained.

In a previous statement, Africa’s richest man, Aliko Dangote, affirmed that Nigeria would cease importing petrol by June 2024 due to the Dangote Refinery’s capacity to meet local demand.

Dangote also expressed confidence in the refinery’s ability to cater to West Africa’s diesel and aviation fuel needs.

Challenges and Governmental Role

However, achieving this price reduction is contingent on several factors, including the provision of crude oil at the naira equivalent of its dollar rate.

CORAN has advocated for this approach, citing that it would bolster the naira and reduce the financial burden on refiners who currently buy crude in dollars.

The Nigerian government has shown some commitment towards this goal. Gbenga Komolafe, Chief Executive of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), confirmed that a framework has been developed to ensure consistent supply of crude oil to domestic refineries.

“We have created a template for the Domestic Crude Oil Supply Obligation to foster seamless supply to local refineries,” Komolafe stated.

Industry Reactions

Oil marketers have welcomed the potential for reduced petrol prices. Abubakar Maigandi, President of the Independent Petroleum Marketers Association of Nigeria (IPMAN), expressed optimism about the Dangote Refinery’s impact on petrol prices.

“We expect the price of locally produced PMS to be below the current NNPC rate of N565.50 per litre. Ideally, we are looking at a price around N500 per litre,” Maigandi noted.

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