James Emejo writes that just as lack of access to credit could hamper business and retard economic growth, inability/refusal to pay back borrowed loans could adversely affect the economy and dissuade financial institutions from further lending to the real sector

There’s no doubt the Central Bank of Nigeria (CBN) has done a lot to improve the lending regime in the banking and financial landscape in the country.

Before now, the real sector particularly manufacturing as well as individuals and small businesses were practically denied access to credit facilities with the exception of multinationals and oil companies.
Except for the latter, no other entities were adjudged by the banks to eligible for financing given their risks assessments.

Agriculture even suffered the most in terms of credit neglect from the banking industry due to their summation that the sector was too risky to be entrusted with facilities.

Coupled with the high interest rate regime and ridiculous safeguards in terms of collateral set before prospective borrowers, it would be concluded that the hope of accessing finance by businesses and Micro Small and Medium Enterprises (MSMEs) from the banking system was like crying for the moon.

But all that has changed now, at least so it appears. With current efforts by the apex bank aimed towards ensuring that banks performed their role of financing the economy and with several initiatives put in place to advance credit to the real sector, the business world has not been this rosy.

The CBN had launched several policy interventions to improve lending to the real sector using monetary policy instruments including bank’s Cash Reserve Requirements (CRR), Loan to Deposit Ratio (LDR), Global Standing Instructions (GSI) among others to encourage the banks to lend to sectors like agriculture which was hitherto forbidden for the banks.
The CBN Governor, Mr. Godwin Emefiele, recently noted that there had been marked improvement in lending to the real sector following the introduction of the LDR in 2019.

According to him, industry gross credit increased by N6.63 trillion from N15.57 trillion at end-May, 2019 to N22.20 trillion at end-July, 2021adding that the credit growth was largely recorded in manufacturing, oil and gas and agriculture sectors.

Furthermore, the challenges and opportunities presented by the COVID-19 pandemic had enhanced credit delivery to the real sector through both fiscal and monetary policy interventions.

Sustaining Recovery

The CBN had been commanded over its interventions to sustain the recovery of output growth and address the downside risks to other external and domestic shocks to the economy.

According to Emefiele, the CBN under its Anchor Borrowers Programme (ABP) had cumulatively released the sum of N798.09 billion to 3.9 million smallholder farmers cultivating 4.9 million hectares of land across the country.

Out of this for the 2021 wet season farming, the bank released the sum of N161.18 billion to 770,000 smallholder farmers cultivating seven commodities on 1.10 million hectares across the country.

He said under its Commercial Agriculture Credit Scheme (CACS), the CBN had supported 657 large-scale agricultural projects, to the tune of N708.39 billion, adding that to support MSMEs across the country, the bank disbursed N134.57 billion to 38,140 beneficiaries under the Agribusiness/Small and Medium Enterprise Investment Scheme (AGSMEIS), and for the Targeted Credit Facility (TCF), the sum of N343.21 billion has been released to 726,198 beneficiaries, comprising 602,730 households and 123,468 Small and Medium Enterprises.

Also, under the Real Sector Facility, the Bank released the sum of N1.00 trillion to 269 real sector projects, of which 140 are in light manufacturing, 71 in agro-based industry, 47 in services and 11 in mining.

Equally, under the Healthcare Sector Intervention Facility (HSIF), N103.02 billion has been disbursed for 110 healthcare projects, of which 27 are pharmaceutical, 77 hospitals and 6 other healthcare service projects.

The bank had also disbursed a total of N145.99 billion under its Non-Oil Export Stimulation Facility (NESF).

In addition, under the National Mass Metering Programme (NMMP), N41.06 billion had been disbursed to 10 DisCos, for the procurement and installation of 759,748 electricity meters while under the Nigerian Electricity Market Stabilization Facility – 2 (NEMSF-2), the Bank had released the sum of N145.66 billion to 11 DisCos as loans to provide liquidity support and stimulate critical infrastructure investment to improve service delivery and collection efficiency.

Also, in furtherance of its intervention in the energy sector, the CBN had disbursed N39.20 billion to six beneficiaries to improve gas-based infrastructure to support the federal government’s Auto-Gas Conversion Programme.

However, one of the major concerns of the credit delivery programme in banking sector had been the credit recovery mechanism as majority of the loans extended to businesses in the past had gone bad and debtors in some cases deliberately refused to payback with the attendant implications on banks’ balance sheets and the economy in general.

The CBN had regularly reminded beneficiaries that any credit they collect is not national cake but must be repaid.

Reducing NPLs

Although analysts said this development if allowed to fester would not augur well for the economy in the long run, as if would also increase the level of Non Performing Loans (NPLs).

Nevertheless, Emefiele said the NPLs ratio at 5.4 per cent in July 2021, had improved compared with 5.7 per cent in June 2021.
He said the CBN would work to sustain current efforts to bring NPLs below the 5.0 per cent prudential benchmark.

However, speaking recently during an engagement with the judiciary, the CBN had lamented that recalcitrant debtors had exploited the non-prioritisation of credit recovery matters in the Nigerian judicial system to frustrate debt recovery efforts by financial institutions.

He added that the CBN is currently informally engaging the key stakeholders in the judiciary to operationalise this provision.

The CBN governor said the bank’s policy on Global Standing Instruction (GSI) and the special tribunal for loan recovery which was provided for in the Banks and Other Financial Institutions Act (BOFIA) 2020, would both accelerate credit recovery processes and enforcement of collateral rights, adding that these will also address the incidence of non-performing loans that had posed a great threat to the Nigerian financial system.

Emefiele, at the workshop for judicial officers on recent reforms to enhance the resilience of the Nigerian banking and financial services sector – particularly the BOFIA 2020, said the special tribunal for the enforcement and recovery of eligible loans was introduced in the Act to accelerate credit recovery processes and enforcement of collateral rights.

Anti-Money Laundering Effort

He also pointed out that BOFIA had further strengthened the Anti-Money Laundering and Combating Financing of Terrorism (AML/ CFT) Framework by mandating regulated entities to comply with AML/CFT and cybersecurity regulations.

However, analysts in separate interviews with THISDAY said unless addressed, the development could slow down loan disbursements by banks.

They also called for greater sanctions for default adding that the bankruptcy laws should be taken more seriously and enforced.

Managing Director/Chief Executive, Credent Investment Managers Limited, Mr. Ibrahim Shelleng, said businesses being faced with double-digit interest rates will undoubtedly struggle to make repayments given the current ailing economy and high inflation.

He said, “Whilst increased credit to the real sector is a positive thing, we must consider two things…At what cost is that credit to small businesses?

“The absorptive capacity of credit to the economy given multiple fiscal challenges will undoubtedly be low. That means that there is only so much credit that the economy can absorb to start growing and after that adding more credit doesn’t necessarily grow the economy any more.”
Shelleng said, “Undoubtedly bank non-performing loans (NPLs) would increase and lead to a contracted credit supply, which would affect growth in the economy.

“I would suggest that there needs to be more synergy between fiscal and monetary policy to help in boosting real sector as a driver of economic growth. Fiscal could spend on industrial hubs and infrastructure whilst monetary focuses on reducing interest rates to provide cheaper funding. There also needs to be greater sanctions for defaults. Bankruptcy laws should be taken more seriously and enforced.”

Also speaking to THISDAY, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, said the failure to repay loans would hamper economic activities, “which result to the situation we found ourselves about six years ago when bank were lending to the government through treasury bills and bonds because of attractive rates.”

He said, “The economic downturn has affected the cash flow of some debtors to the extent that they have continuously failed on their repayment obligations to banks. While we have some debtors unwilling to pay back we also have some that are willing but unable to pay,”
Gbolade said.

According to CBN policy on lending, which was upgraded and enforced after the last restructuring of banks due to bad loans, the CBN warned bank about lending without collateral and such lending must not exceed a certain threshold if it would be done at all.

“I believe most of these loans are adequately collateralized and the banks have leverage to realise the collateral pledge for the loan. The major implication of these developments to the economy is that most banks would slow down on lending,” he said.

He also noted that the CBN had given banks the approval to name and shame chronic debtors by publishing their names in the national newspapers and also undertake other appropriate measures for recovery, and hoped this could save the situation going forward.

“The Asset Management Corporation of Nigeria (AMCON) is also obligated by law to buy off this toxic loans from banks at a premium and pursue the debtors for negotiation, restructuring and repayment,” he added.