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By Omodele Adigun
As the Federal Government plans to spend its way out of recession with N1.75 trillion, can the banking industry still function in the spending spree with bad debts and the downgrade of its credit ratings?
This is against the backdrop of innovation, better quality service, low interest loans among other panaceas recommended for the banks to take the economy out of the woods.
Recall that the government is warming up to expend N1.75 trillion in capital spending for the rest of the year. And so far, according to President Muhammadu Buhari, over N720.5 billion has changed hands in the last 10 months to pull the nation out of recession. But for the majority of Nigerians, there are growing concerns that the effect of such huge spending is yet to be felt by the man in the street.
Despite these concerns, however, the Debt Management Office (DMO) believes that the Federal Government still has space to borrow abroad to help government plug its N2.2 trillion budget deficit and make more funds available for capital investments.
Earlier this month, the DMO held a week long roadshow in London and the United States to promote a planned $1 billion Eurobond issue.
With all these, one cannot but wonder, where lies the capacity of Nigerian banks to fund big ticket transaction?
At time like this, the vital role of banks in developing or resuscitating an ailing economy, like Nigeria, can hardly be ignored, considering the fact that their credit fuels economic activity, particularly, by allowing governments to smooth out their spending and invest in infrastructure.
“Recently we have been working on some international syndications relating to the acquisition of oil blocks in Nigeria by two international companies, the provision of reserve-based lending to two multinational oil companies, the reacquisition of an oil block for subsequent resale by a state-owned oil company in a West-African state, the establishment of a 1.4 million metric tons-per-day fertiliser plant in a West-African state, and the $3 billion syndicated loan facility for the Nigerian subsidiary of the telecommunications giant, MTN,” said one of the big banks after the 2005 consolidation.
And it was on record that before the capital market meltdown of 2007/2008, the total loans to the economy ran to billions of Naira. But today the table has turned full circle. The half year report released by the CBN is a pointer to this: The banking system’s credit to the Federal Government fell by 23.5 per cent to N2.893 trillion, “in contrast to the growth of 30.7 and 26.5 per cent at the end of the preceding quarter and the corresponding quarter of 2015, respectively.”
Reserve money (RM) was said to have fallen by 6.4 per cent to N5.37 trillion at the end of the second quarter, reflecting the decline in both commercial banks’ reserves with the CBN and currency in circulation.
Failure of banks
Facilitators at the just-concluded seminar for finance correspondents and business editors in Abakaliki, Ebonyi State, inferred that the massive failure of financial institutions and government’s Ministries, Departments and Agencies (MDAs) to fund critical sectors of the economy caused the central bank and private investors to fill the gap. Maybe that is why former President of the Nigeria Bar Association (NBA), Olisa Agbakoba, accused the Nigerian banks of causing the present recession.
Hear him: “The single biggest culprit in our present predicament are the banks.
During the great depression in America, banks were busy speculating and trading. But, the president, Franklin Delano Roosevelt, got theCongress to pass a law – the Glass-Stegall Banking Act, directing banks not to speculate or trade, but lend. This strictly restricted what banks can do.
“The work of a commercial bank is to lend. If you don’t regulate any profession, it will go haywire. So CBN must have more cohesion in regulation. In the UK, their own central bank; the Bank of England created a special supervision agency called the Prudential Regulatory Authority. That is all they do. You may wonder that all the money that the CBN pumps into the system – airline intervention fund, electricity intervention fund etc – the banks don’t lend them out to the sector that needs it and at the required rate, which is single digit. The banks lend them as ordinary commercial notes to the big cartels; the big investor cartels, therefore, starving the very people for whom the loan is intended like the SME’s (Small and Medium Scale Enterprises). So, no wonder the system is bleeding. No nation can afford not to regulate. In Kenya, the central bank there regulates the lending rates. I am not in support of that in Nigeria, but has it occurred to you that the Federal Government of Nigeria is the biggest generator of money, but it cannot control the rate at which money is lent. So they put the money in the bank, and the bank lends it right back to the government at very high rates. In order to deal with that problem, the government through the Treasury Single Account (TSA), is depriving banks of liquid cash. That will not solve the problem, because the TSA funds are sitting idle in the CBN vaults. What the government should have done is to tell banks that this is our money. We are giving it you, but your lending rates must be 3 per cent. When the British government found that it was difficult to cater for school leavers, they set aside £20 billion, and picked four banks to handle the process. They told the banks that we cannot lend. You know how to do it, but do not exceed 2 per cent. That is how to stimulate the economy.”
As if to respond to this, the Managing Director of Fidelity Bank Plc, Mr Nnamdi Okonkwo, lamented that banks get a lot of bashing for not lending long-term and giving out loans at single digit interest rate. When confronted with fact that UK banks lend at single digit, he explained that inflation rate there is also in single digit as against the double digit in Nigeria.
In defending Nigerian banks, Okonkwo said: “If as a banker, I know the secret place, where I can find long-term funds, we will be the number one bank in Nigeria today, because I can lend long-term”, he said.
Okonkwo explained that most depositors who have huge amounts to save, invest in short term basis and collect huge interest on such deposits.
“I want to borrow N100 million, then bring me one depositor who will place N100 million with me at 10 per cent and I will lend at 15 per cent. Remember that in calculating those 10 per cent of N100 million, what you have actually given me is N75 million because N25 million will be placed with the CBN as Cash Reserve Ratio (CRR). And for me to access N5 million out of the N25 million CRR cash, I have to lend the money for use in industrial production. Then what are your risk assessment criteria if the industrial sector you want to lend to is fighting for breath,” he asked.
Beside, the CRR, he said such lender has to pay five per cent of the N100 million initial deposit to Nigeria Deposit Insurance Corporation (NDIC) as premium. “People actually believe that banks are not lending long-term because they do not want to. We do profitable business,” he said.
As for inflation rate, Moses Tule, Director, Monetary Policy of CBN, explained that the hands of the apex bank are tied in bringing it down. It has to do with cause and effect scenario.
He stated: “If inflation is not a monetary phenomenon, but arisen because of structural deficiencies in the economy, there is nothing the monetary authority can do because they do not have the tools to deal with non-monetary instigated inflationary trends. It is only if it is as a result of the growth in money supply that we are seeing episodes of inflation arising that the tools of monetary policy can address inflationary trend. So, if you increase electricity tarrifs, and as a result of that, cost of manufacturing rises, and there is increase in prices of goods and services, there is nothing the monetary authority can do. If you have shortage of foreign exchange, and little imports of food come in, and there is scarcity of food supply, and prices of food supply go up within the country, there is nothing that the monetary authority can do. If we depreciate the currency, and more Naira is chasing fewer dollars, and those prices move across the entire spectrum of the economy, the instruments available to monetary policy are blunt in addressing those issues.”
On bad debt, over N649 billion was said to have been recorded as non-performing loans in the sector last year, almost at the 5 per cent regulatory threshold. This has triggered a wave of negative report by the global rating agencies, emphasizing the inability of the banks and the government to help each other at a time like this.
However, reacting to their reports at the last 329th Bankers’ Committee Meeting in Lagos, Mrs Tokunbo Martins, the central bank’s Director of Banking Supervision, said the report should be ignored.
Recall that Arqaam Capital, a Dubai-based investment bank and brokerage firm, in their latest report, said the Nigeria’s banking industry is experiencing a full-blown financial crisis as failed fiscal and monetary policies lead to a credit crunch.
“Our acid test reveals seven under-capitalized banks with a deficit of as much as N1 trillion ($3.2 billion) in the financial system”, the report said.
Reacting to this, Mrs Martins said: “That report is false; that certain banks are undercapitalized is absolutely not true. That is not saying that the banking sector is not feeling the economic headwinds. So it is too in any other jurisdictions. It is not strange.
“Also that the non-performing loan is at 11 per cent. That is not what we need to focus on. What we need to focus on is that we have the 11 per cent non-performing loans. Do banks have the capacity to absorb any losses that may arise from these loans? Yes, they do. They have very strong capital buffers.
Another thing that is very important is that banks have huge capacity to generate income. So apart from the capital buffers that they already have, they also have capacity to generate income to also absorb all those losses if they do arise.
And the loans that are not performing, can they be performing? Yes, they will.Because the underlying assets are still there and they are good.
“The fact that the country has non-performing loans at a period like this is to be expected.And I don’t think that any jurisdiction should be demonized because of it. If you look at other jurisdictions that are going through the same circumstances that we are going through , they are experiencing the same thing.These jurisdictions have non-performing loans as high as 15 per cent to 25 per cent. So countries in Europe have NPL as high as 18 per cent,” she said.
Some experts advise the banks adopt innovative measures to reinvent themselves in the face of the economic downturn. Speaking to a national daily recently, Tobe Nnadozie, Divisional Head, Innovation and Products of Heritage Bank Limited, said:“Certainly because of the prevailing economic challenges banks have to look at more creative ways to grow their bottom line. You know in the recent past, banks had to rely heavily on foreign exchange-related businesses to generate the highest deposits. However, what they can do now is to try to add value to customers beyond what they used to do.”
Specifically, he said banks need to give more value in terms of products and services to customers. He added: “We’re helping the states to plug loopholes because we reckon that once we are able to help them plug these leakages they can save at least 40-60 per cent in IGR. In these days and times, banks, of course, have more fool-proof businesses. Most banks were involved in public sector business before now. But right now, there is no need to have over staff pursuing public sector. At Heritage Bank, rather than lay off people, what we have done is to reassign most of our staff to help drive innovations. And that is working.”
