By Babajide Komolafe
The prospect of bleak turnover due to the credit freeze in the banking industry has become a source of concern for the boards of some banks and thus their executive management. Bankers are worried that with low income the banks are getting now prospects of robust dividend is ruled out which is the bottom line for all investors. Bank boards and their executive management will be facing hard times with shareholders at this year annual meeting.
According to a top banker who spoke to Vanguard last week â€œMost banksâ€™ board and management are becoming jittery over shrinking income. When you have overheads to pay for and have to face shareholders at the end of the year, you would be concerned that your bank is not lending because it is through that you make incomeâ€, he added
â€œEventually the boards might be compelled to take the bull by the horn and insist on a change in attitude to lending. Though good credits are few, the fear of poor income performance might force banks to go out there and look for credits. And what would happen is that banks would begin to categorise credits.â€
Vanguard investigations revealed that the lacklustre attitude to lending has assumed a worrisome dimension among top management staff in banks.
In some of the banks, the interest income performance for the first two months of the year is far below target. And the reason is that credit extension is at unprecedentedly low levels. Giving a graphic picture of the situation, a senior treasurer said, â€œIn the past we get directive to fund credit ofÂ N 2 billion or of N 3 billion. But these days what we have is directive to fund N 10 million or N 20 million. How do you make money with that volume of credit? He asked.
This was further confirmed by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) which reported decline in money supply into the economy occasioned by decline in credit to the domestic economy.
According to the MPC, Broad money supply declined by 3.11 per cent in January. It also indicated that credit to domestic economy on annualised basis fell by 22.44 per cent while credit to private sector fell by 16.20 per cent.
Vanguard investigations also revealed that total value of cheques cleared in Lagos area was down 14 per cent to N 881 billion in February. This according to the MPC indicates,â€œ that the private sectorÂ particularly, small and medium enterprises, were being starved of the much-needed credit.â€
This according to the Committee resulted to weak aggregate demand and hence a sharp fall in the economic growth rate for the first quarter of the year as reflected by the gross domestic product (GDP). Provisional data from the National Bureau of Statistics (NBS) indicates that real Gross Domestic Product (GDP) will grow by 6.68 per cent in the first quarter of 2010, down from 8.23 per cent in the fourth quarter of 2009.
Realising the inherent dangers the credit freeze poses to the growth of the economy especially the 7.53 per cent growth rate target for 2010, â€œThe MPC further stressed the need to unlock the credit market.â€
And to achieve this the Committee reduced the interest rate on banksâ€™ deposit with the CBN (standing deposit facility) to 1.0 per cent from 2.0 per cent. It also, provided N 500 billion facility for investment in debentures issued by the Bank of Industry (BOI) for investment in emergency power projects dedicated to industrial clusters.
The funds are to be channelled through the Bank of IndustryÂ for on-lending to the DMBs at a maximum interest rate of 1.0 per cent for disbursement of loans with a tenor of 10 â€“ 15 years at concessionary interest rate of not more than 7.0 per cent. The Committee also approved in principle the extension of this facility to DMBs for the purpose of refinancing/ restructuring existing portfolios to manufacturers.
However, bankers reacting to these new policy measures by the monetary authoritiesÂ said that theseÂ measures though laudable are not far reaching enough to effectively unlocking credits into the economy.
â€œThey do not address the real reason why banks are not lendingâ€, said a senior treasury officer in one of the rescued banks. â€œThere is restraint in the industryâ€, he said.
â€œThere is fear in the market. People do not know who to give credit toâ€, said another treasurer. This, he said is because good credit had gone bad in the past. â€œThere were credit that were subjected to all the necessary risk appraisals and were termed good credits but they went bad. So people are afraid to lend because they do not want to lose money and be hoarded by agent of Economic and Financial Crime Commission again. The confidence level is very low, though it would return, it would be gradual and it will take some timeâ€, he said.
Another top banker said that while the N 500 billion initiative for the real sector is good especially the refinancing aspect for previous power and manufacturing projects, nothing will change between now and the next MPC meeting. Retaining the CBN deposit rate at 1.0 per cent is not enough to discourage banks from keeping their money with the apex bank. The CBN will have to reduce its deposit rate to zero per centâ€.
These views were corroborated by theÂ Managing Director/Chief Executive, Financial Derivatives Company Limited, Mr. Bismark Rewane in a monthly economic news and views presented at theÂ Â Lagos Business SchoolÂ Executive Breakfast meeting last week. He said, â€œThe MPC acknowledgement of a credit crisis is a healthy development at a time of national self deception. The decisions of the committee do not address the credit crisis. The credit crunch is unlikely to ease anytime soon. The ghost of and extreme level of risk aversion in the banking system will not be exorcised with this measureâ€.
The implication is that despite these laudable measures, the motive for banks to open their vault and start lending to the economy is still not there. The apex bank will have to address the psychological barrier of fear, uncertainty and low confidence in the banking industry to unlock credit.
And the MPC itself alluded to this. â€œMembers also observed that there is sufficient liquidity in the money market as suggested by the low interbank interest rates, but that the perception of credit risk on the part of the DMBs remained a major constraint to their ability to lend to the real sector of the economy.â€
All this reinforces the palpable fear in banksâ€™ boards that income and profitability and henceÂ dividendÂ for shareholdersÂ might be far below expected for the 2010 operating year.