Banks To Slash Loans Over Rising Credit Risk

Banks may not significantly increase their loans to borrowers, despite the Central Bank of Nigeria’s directive to the Deposit Money Banks on its Loan to Deposit ratio mandate.

A research credit rating, and credit risk management company, Augusto& Co, disclosed this in its recent report on the banking industry in Nigeria.

While explaining the LDR mandate, an analyst with Augusto & Co, Ada Ufomadu, noted that the CBN mandated all DMBs to maintain a minimum LDR of 60 per cent by September 30, 2019.

She said,” The focus of the LDR minimum is to promote consumer and mortgage credit to drive demand. Most tier 2 banks comply with the new LDR minimum requirement, but not all Tier 1 banks do.

“We do not foresee a significant increase in loan book due to a potential increase in credit risks.”

She also noted that short timeline given to the banks was a major challenge in complying.

While speaking on the Nigerian payday loans industry, another analyst with Augusto & Co, Osaze Osaghae, explained that payday loan was also referred to as salary advances, payroll loans and payday advances.

He said it was typically a small, short-term unsecured loans that were tied to a borrower’s payday.

“These loans are designed to meet the short-term needs of an individual until the next payday, when the loan is usually repaid in full,” he said.

Despite an active (adult) population of 99.6 million in 2018, he said only 39.7 per cent were banked by registered financial institutions.

He noted that only eight per cent of the total active population was formally employed, considerably lower than other major nations in sub-Saharan Africa.

Osaghae said payday lending first emerged in the early 1990s as banks in developed countries dialled back on small credit offerings, leaving consumers in need of quick-fix cash and emergency funds with little choice but to turn to alternative lenders and financiers.

“Since then, these short-term, high-cost loans have risen in popularity across the globe, particularly in first world countries,” he said.

He said over the last decade, evolving financial technology had disrupted lending activities in many parts of the world, with a large number of online lending platforms emerging in countries such as the Netherlands, United States and Canada.