- 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.
