Weak Economic Activities May Force Banks to Cut Lending

bank loans
  • Weak Economic Activities May Force Banks to Cut Lending

Weak economic activities due to lockdown in key states could prevent banks from lending money to the private sector, according to analysts.

Analysts doubt banks will create new loans in view of the current disruption in economic activities and an increase in the risks associated with such investment in recent weeks.

“If the economy is fragile as we are seeing, lenders may be hesitant to lend as they fear that loans may go bad. And if the loans go bad, that might result in spiralling non-performing loans that will impair their capital,” said Ayodeji Akinwunmi, head of corporate banking at FSDH Merchant Bank.

“The situation is presenting an opportunity for government to diversify the economy away from reliance on oil,” said Akinwunmi.

It should be recalled that the Central Bank of Nigeria had increased the Loan-to-Deposit ratio to 65 percent to force Deposit Money Banks (DMBs) to increase credit facility to the private sector.

The initiative led to 14 percent year-on-year growth in credit facility to the private sector in 2019. DMBs credit to the private sector rose to N17.2 trillion in 2019, the highest since 2007.

However, weak economic fundamentals amid projected slow economic activities could prevent banks from lending to the private sector after the lockdown. Nigeria’s unemployment rate remained high at 23.1 percent or 20.9 million people, the inflation rate rose to a 21-month high in February and foreign reserves has been on a downward trend since June 2019.

The critical state of the nation forced the central bank to adjust the foreign exchange rate of the Naira to reflect changes in the nation’s economic fundamentals after calling experts criminal with the sole aim of profiting from the forex market.

Deposit Money Banks have started putting limits on foreign spending on naira denominated cards, another sign they are doubting central bank’s ability to effectively intervene at the forex market as usual given low oil prices and drop in the nation’s foreign reserves to $35.5 billion, down from $45 billion in June 2019.

All these could change if the projected oil agreement between Saudia Arabia led 14 members and Russia materialised on April 9, 2020. Crude oil broke rose to $33 per barrel on Monday following President Trump’s tweet on Thursday that the two oil giants would cut production by the most on record.

Still, experts expect demand for loans to drop during this period.

“On the demand side, we expect the pass-through impact of subdued economic activities to constrain the demand for credit from individuals and corporates,” said analysts at CSL Securities Limited.

“In the medium to long term, credit creation in the economy depends on the pace of flattening in the curve of COVID-19 cases as well as the rebound in oil prices,” said the analysts.

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

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