MPR: Banks Raise Interest Rates on Existing Loans

interest

Bank customers with existing loan obligations must brace for higher levels of indebtedness as the Deposit Money Banks have begun an upward review of the interest rates on all outstanding loans.

The development followed Tuesday’s increase of the Monetary Policy Rate from 12 per cent to 14 per cent by the Central Bank of Nigeria’s Monetary Policy Committee.

Multiple banking sources told one of our correspondents on Thursday that the lenders would as early as next week begin to dispatch letters to their customers, informing them of the upward review of the interest rates on their loans.

“Banks don’t waste time on matters like this. The increase in the MPR means interest rates on loans have to go up. We have started writing letters to our customers. A few may go this week, while more will go next week. Customers will get the letters in emails and hard copy,” a top executive of a tier-1 bank told one of our correspondents under condition of anonymity on Thursday.

Other top bank officials, who confirmed the development, did not state the rate of increase in the interest rates on the outstanding loans.

They said the upward reviews of the rates were being done with keen consideration for certain conditions relating to each bank customer.

“What applies to customer A may not apply to customer B. We take keen look at each customer and their peculiar situation, including their loan history with us, before making the review. But the fact is that an increase is inevitable with the hike in the CBN’s MPR,” another top bank official said.

Banking experts say the MPR, often called the benchmark interest rate, is the yardstick for other interest rates bank charges on loans advanced to their customers.

The MPC had after its bi-monthly meeting on Tuesday increased the MPR from 12 per cent to 14 per cent. The measure was meant to reduce the amount of cash in circulation and thus fight inflation, which hit 16.5 per cent in June.

A financial analyst at BGL Plc, a research and investment advisory firm, Mr. Femi Ademola, said banks usually reviewed interest rates on loans whenever the CBN raised or lowered the MPR.

This, he said, was why banks usually included the clause: ‘Subject to prevailing interest rate’ on their offer letters for loans.

Officials said the latest review by the banks might move the interest rate on some loans from between 25 per cent and 27 per cent to around 30 per cent.

Ademola said while the banks would enjoy more interest income from the upward review, a small part of this amount would be paid to savings account customers as interest on their deposits.

In line with the CBN regulations, savings account customers are paid 30 per cent of the MPR as interest on their deposits. With the increase in the MPR, about 0.6 per cent of each customer’s savings account deposit will be credited to their account as accrued interest on their savings.

Analysts described this as negligible compared to what the banks would earn from the additional interest rate imposed on loans.

Meanwhile, manufacturers said the decision of the CBN to raise the MPR was a deadly blow to an already comatose manufacturing sector, adding that more sector operators were bound to close shops.

A local manufacturer of envelopes and Managing Director, FAE Limited, Princess Layo Okeowo, said, “I just pray that we do not all close our doors. The foreign exchange situation is already becoming unbearable with manufacturers having to wait for ages after bidding to get dollars. The increase in interest rate is a bitter pill to swallow and it has made an already bad situation worse.

“It is certain that the banks will readjust their interest rates even for people who have outstanding loans. It is certain that within the next one week, the banks will start writing letters to their debtors notifying them of increased interest rates on loans.

“Manufacturers will have to increase prices and already, the purchasing power is very low and the number of our customers has reduced drastically.”

An executive director in one of the leading aerosol firms in the country, Mr. Kingsley Oni, said because of the scarcity of dollars, his company had to lay off workers for the first time in its more than 20 years’ of existence.

Oni said, “We have over 2,000 workers; because we are not getting dollars, for the first time, we are retrenching. The point is, when they keep raising these interest rates, the impact on the manufacturing sector is very negative.

“The CBN cannot control inflation, but a situation where a country is in this situation and you still find a lot of private jets all over Abuja is what baffles me. One of those jets can be sold and the money ploughed back into the real sector to create jobs if the government is really serious.”

The Chairman, Qualitek Industries, Chief Olayinka Kufile, said although the CBN was trying to control inflation, the reality was that many industries in the country had become comatose.

He said, “Most activities in the manufacturing ector have been grounded. In the basic metal industry where I operate, everything is flat, because while we were trying to get out of the problem of the dollar increasing from N158 to a dollar to N200 to a dollar, we lost a lot of money. Before we could even get out of that, the dollar kept increasing and now it is more than N300 and the people who took loans at the exchange rate of N197 to a dollar are in heavy debts.

“If the government is hoping to earn money in taxes from the non-oil sector, they cannot get those taxes where companies are not producing and making money. Most industries today are not producing and they have reduced their staff strength to near zero.”

For the Director-General, Manufacturers Association of Nigeria, Mr. Remi Ogunmefun, within the concept of economics, the CBN was right to increase the benchmark rate in order to spur savings and investment as well as control inflation.

He said, “The implication of the increase for manufacturers is that the cost of borrowing will rise higher than it is already. It is quite unfortunate because over the years, we have been clamouring for a single digit interest rate.”

About the Author

Samed Olukoya
CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade long experience in the global financial market. Contact Samed on Twitter: @sameolukoya; Email: [email protected]

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