Banks Divert Loans To Public Sector
In apparent demonstration of low confidence in the economy, banks are focusing their lendings to the public sector to the detriment of the private sector.
Despite the increased tempo of economic activities following the lifting of the Coronavirus induced economic lockdowns, banks lending to the private sector crashed by N425 billion in September 2020.
According to the Central Bank of Nigeria, CBN, monthly Depository Corporation survey report, credit to the private sector dropped by 1.41 percent to N29.71 trillion in September from N30.13 trillion in August.
On the contrary, credit to the government rose by 13.51 percent to N9.68 trillion in September from N8.56 trillion in August.
In overall, credit to the economy rose by 1.81 percent to N39.39 trillion in September from N38.69 trillion in August.
The N425 billion decline in credit to the private sector in September, follows a similar trend in lending to consumers, which fell by 11 percent or N100 billion for two consecutive months, in July and August by 11 percent to N1.4 trillion.
This trend which reflects increasing apathy of banks to lending in a bid to curtail bad loans, follows increased loan default by households and businesses
According to the CBN Credit Condition Survey report for the third quarter (Q3’2020), banks recorded more loan defaults during the quarter.
The report stated: “The performance of total unsecured loan to households, measured by default rates, worsened in Q3 2020 and it is expected to deteriorate further in Q4 2020.
Lenders experienced higher default rates on credit card and overdrafts/personal lending to households in Q3 2020 but expect lower default rates in Q4 2020.
“Losses given default on total unsecured loans to households and overdraft/personal loans to households both declined in Q3 2020. Similarly, default on total unsecured loans to households was expected to worsen further while default on overdraft/personal loans to households would improve in Q4 2020.
“Corporate loan performance as measured by the default rates worsened for small businesses and medium PNFCs but improved for large Public Non-Financial Corporations (PNFCs) and small businesses and Other Financial Corporations (OFCS) in Q3 2020. However, lenders expect lower default rates on lending to all sized businesses except small businesses in Q4 2020.”
As a result of this development, and to curtail loan defaults, banks tightened lending criteria and also in some cases restricted the number of loan applications.
The CBN stated: “As lenders’ resolve to tighten the credit scoring criterion for total unsecured loan applications in Q3 2020, the proportion of approved total loan applications for households decreased. Lenders expect to also tighten the credit scoring criteria in Q4 2020 but anticipate that the proportion of approved loan applications will increase. The proportion of approved credit card loans decreased in Q3 2020, though the credit scoring criteria for granting credit card loans was loosened. However, the proportion of approved overdraft/personal loan applications increased, as lenders tightened the credit scoring criteria
“Lenders required stronger loan covenants from all firm sizes in Q3 2020, a stronger loan covenant is expected in Q4 2020
“More collateral requirements were demanded from all firm sizes on approved new loan applications in Q3 2020 and lenders expect to demand higher collateral from all firm sizes in the Q4 2020”.