THE NEW LENDING POLICY OF THE CBN
The new lending policy for deposit money banks which prescribes a minimum Loan Deposit Ratio of 60%, effective 30th September 2019 is a move in the right direction. The focus of the policy on SMEs, Retail, Mortgage and consumer lending under the proposed lending regime is laudable.
The Nigerian private sector has over the years grappled with issues of credit access, cost of credit and tenure of funds. These challenges are more severe for MSMEs in the economy with huge financing gaps. The economy has been characterized by profound crowding effect of the private sector in the financial markets owing to more attractive returns from credit to government through the instrumentalities of treasury bills and federal government bonds. These developments created considerable distortions in the financial markets and considerably impeded domestic investment. It created major financial intermediation issues as the banking system became largely disconnected from the investing public. The real sector investors and the SMEs were the foremost victims of this distortion.
The high and attractive returns on government debt instruments was a major worry because they have zero risk and the earnings are tax exempt. Naturally, there was a gravitation of capital towards these investment windows, depriving the investment community of funds, posing major constraints to job creation and the advancement of the economy.
The LCCI sees this new lending policy as a timely policy intervention to normalize the credit markets, spur economic growth and broaden the interface between entrepreneurs and the banking system. The banks will be obligated to be more tolerant of the entrepreneurs and be more creative in the creation of financial assets. The LCCI expects that the new lending policy would impact the economy in the following ways:
• The quality of financial intermediation will be improved and this would impact the economy better as funding gaps in many sectors are addressed.
• Reduction of the crowding out of the private sector in the credit market.
• Improvement of economic inclusion as more SMEs and broader range of sectors have better access to credit.
• Deepening of the money market
• Promotion of economic diversification in line with the Economic Recovery and Growth Plan [ERGP]
• Improvement in purchasing power as consumer credit increases. This would also impact positively on the economy because of the stimulating effect increased aggregate demand.
• Higher probability of reduction in interest rate as supply of credit increases.
• Improvement in lending creativity and innovation by the banks.
• Broader and more diversified sectoral coverage of lending.
Meanwhile in order to address some of the possible downside risks in respect of loans asset quality arising from the new lending policy, we implore the CBN and the fiscal authorities to undertake the following:
• Strengthening the Collateral Registry to enhance the profiling of borrowers in the banking system. The character of the borrower has been identified as a major risk factor in the lending in the Nigerian economy. Effective credit registry would be improve the quality of customer profiling and credit risk management.
• Development of SME rating agencies to support credit assessment an evaluation in the SME space.
• Need to scale up corporate governance practices in the banking system to prevent insider abuse and compromise of credit assessment processes.
• Strengthen credit guarantee framework to give comfort to the banks.
• Promotion of the use of credit insurance.
• Fiscal authorities should more effectively address enabling business environment issues, particularly infrastructure deficit and quality, in order to improve productivity and reduce credit risk.
• Need to ensure better regulatory environment to reduce regulatory risk and uncertainty.
• Ensure alignment of the new policy with extant monetary policy actions especially with regards to Cash Reserve Ratio and the Liquidity Ratio which are currently at 22.5% and 30% respectively.
We contend that the combination of all of these would reduce the risk of Asset quality deterioration in the banking system. We expect the detailed guidelines of the policy to take the foregoing into account. Once again, we commend the policy and implore the CBN to work with the stakeholders in the economy to ensure impactful outcomes.
LAGOS CHAMBER OF COMMERCE AND INDUSTRY
20TH JULY 2019