•FAAC allocations, N183bn to sustain excess liquidity
By Babajide Komolafe
BANKS said they will further tighten loan conditions in the third quarter 2018, Q3’18, even as they increase lending to the various segments of the economy.
However, credit to the domestic economy dropped by 6.41 percent to N25.71 trillion in May, driven by decline in credit to the government and to the private sector.
Meanwhile the excess liquidity in the interbank money market will persist this week as inflow from Federation Accounts Allocation Committee, FAAC, and maturing Nigerian Treasury Bills, NTBs, worth N183 billion hit the banking system.
Last week, the market enjoyed inflow of N444.3 billion from matured TBs, which cancelled out the impact of liquidity mop up by the Central Bank of Nigeria, CBN, via N137.4 billion worth of Open Market Operations, OMO, bills. The ensuing upsurge in excess liquidity prompted cost of funds to fall, with average short term interbank interest rate falling by 75 basis points to 3.21 percent last week from 3.96 percent the previous week.
This trend is expected to persist this week, baring aggressive liquidity mop up by CBN, as the inflow from FAAC and maturing TBs, far exceeds expected outflow of N60 billion through FGN Bond offer by the Debt Management Office, DMO.
Naira appreciates as I&E turnover rises by 64%
The naira appreciated in the various segments of the foreign exchange market last week, even as the volume of dollars traded in the Investors and Exporters, I&E, window rose by 64 percent last week. The naira appreciated by 60 kobo in the parallel market where the exchange rate dropped to N360 per dollar last week from N360.6 per dollar the previous week.
In the I&E window the naira appreciated by three kobo as the indicative exchange rate dropped to N361.04 per dollar from N361.07 per dollar in the previous week. According to FMDQ, the volume of dollars traded (turnover) in the window rose by 64 percent to $1.29 billion last week from $787.19 million the previous week.
On its part, the CBN sustained its weekly intervention of $210 million in the interbank foreign exchange market.
Banks to tighten loan conditions
Last week, the CBN released its Credit Conditions Survey, CCS, for the second quarter (Q2’18), which revealed that banks will increase credit scoring criteria for unsecured lending to households, as well as demand for more collateral requirements and stronger loan covenant from all categories of firms in the third quarter.
The report also revealed increased lending by banks to households and firms in Q2’18, with banks saying this would be sustained in the Q3’18. The increased lending, according to the banks, is driven by favourable economic outlook, improved liquidity position and higher appetite for risk as well as quest for increased market share.
The report stated: “In the current quarter relative to the previous quarter, lenders reported an increase in the availability of secured credit to households. They noted that improved liquidity position and market share objectives were major factors behind the increase. Availability of secured credit was expected to increase in the next quarter, with favorable economic outlook and market share objectives as the likely contributory factors
“Although lenders maintained the same credit scoring criteria for Secured loans in Q2 2018, the proportion of loan applications approved in the quarter increased. Lenders expect to leave unchanged the credit scoring criteria in the next quarter, yet still expect an increase in the proportion of approved households’ loan applications in Q3 2018.
“The availability of unsecured credit provided to households rose in the current quarter and was expected to rise in the next quarter. Lenders reported higher appetite for risk and increased availability of funds as the major factors that contributed to the increase in Q2 2018
“Despite lenders’ resolve to tighten the credit scoring criteria for total unsecured loan applications in the review quarter, the proportion of approved total loan applications for households increased. Lenders expect to tighten the credit scoring criteria in the next quarter, but anticipate that the total loans applications to be approved in Q3 2018 will increase.
“The overall availability of credit to the corporate sector increased in Q2 2018 and was expected to increase in Q3 2018. This was driven by changing sector-specific risks, favourable economic conditions, improved liquidity conditions, market share objectives and changing appetite for risk. Lenders reported that the prevailing commercial property prices negatively influenced credit availability of the commercial real estate sector in the current quarter.
“The proportion of loan applications approved for all business sizes increased in the current quarter, and are expected to further increase in Q3 2018.
“Lenders required stronger loan covenants from all firm sized businesses in the current and next quarters. Fees/commissions on approved new loan applications fell for all firm sized businesses except the large public non-financial corporations, PNFCs, in the current quarter, but are expected to rise for small business and medium PNFCs and fall for large PNFCs and other nonfinancial corporations, OFCs, for the next quarter.”
Credit to domestic economy falls to N25.71tr
However, the Depository Corporation survey report of the CBN for May showed that banks lending to the domestic economy dropped month-on-month (MoM) by 6.41 percent to N25.71 trillion during the month. The report also revealed that banks ‘demand deposit (current accounts) rose MoM by 6.36 percent to N9.65 trillion while currency in circulation dropped MoM by 1.35 percent to N1.58 trillion.
According the report, Broad Money rose MoM by 2.64 percent to N25.17 trillion in May 2018, driven by a 15.03 percent MoM increase in Net Foreign Assets, NFA, to N18.30 trillion which more than offset a 20.23 percent MoM decrease in Net Domestic Assets, NDA, to N6.87 trillion.
The growth in NFA was partly attributed to sustained high crude oil prices; bonny light traded at $80.65 in May 17, 2018, the highest it has traded in 2018 and hovered around $75. On domestic asset creation, the decrease in NDA resulted from a marginal 0.09 percent MoM decrease in Other Liabilities (net) to N18.84 trillion in the month under review accompanied by a 6.41 percent decrease in Net Domestic Credit, NDC, to N25.71 trillion.
Further breakdown of the NDC showed a 0.21 percent MoM decrease in Credit to the Private sector to N22.21 trillion (share of credit to private sector of NDC rose to 86.35 percent from 80.99 percent), accompanied by a 32.80 percent decrease in Credit to the Government to N3.51 trillion (its share of NDC plunged to 13.65 percent from 19.01 percent).
On the liabilities side, 2.64 percent MoM increase in Broad Money Supply followed a 0.67 percent MoM increase in Quasi Money (near maturing short term financial instruments) to N13.94 trillion and supported by Narrow Money that also increase to N11.23 trillion (of which Demand Deposits that rose by 6.36 percent to N9.65 trillion offset the drop in currency outside banks by 1.35 percent to N1.58 trillion) in May 2018.
Meanwhile, Reserve Money (Base Money) increased m-o-m by 3.63 percent to N6.77 trillion as bank reserves rose MoM by 6.18 percent to N4.49 trillion; however, Currency in circulation decreased MoM by 1.36 percent to N1.93 trillion.