By Babajide Komolafe
THE biting effects of slow economic growth and tighter regulation have triggered an 80 percent decline in banks’ investment in Bankers Acceptances, BAs, over the last five years.
The economic melt-down experienced in the Nigerian economy began late 2014 when oil price came under pressure leading to weakened government revenue and eventual recession, and the economy is yet to fully recover five years after.
BA is a short-term debt instrument issued by a company that is guaranteed by a commercial bank. Unlike Commercial Papers, CPs, which are not guaranteed by a bank, BAs are issued based on the credit worthiness or ability of the issuing bank to repay investors in case the issuing company fails to pay.
This makes BAs less risky investment compared to CPs, and hence attracts patronage from the investing public including other commercial banks.
Financial Vanguard analysis, however, revealed a steady decline in banks’ investments in BAs from December 2014 to May 2019.
Central Bank of Nigeria’s second quarter 2019 economic report shows that banks’ investment in BAs fell by 80 percent to N7.27 billion as at end of May 2019 from N36.6 billion at the end of December 2014.
Further analysis of investment in BAs on year to year basis revealed 22 percent decline to N28.4 billion in 2015 from N36.6 billion in 2014, 2.0 percent decline to N27.8 billion in 2016, 5.0 percent decline to N26.43 billion in 2017, and 56 percent decline to N11.57 billion in 2018. This trend continued in the first five months of 2019, hitting a five year-low of N7.27 billion as at May 31st.
In contrast, investment in CPs, which recorded a similar trend between 2014 and 2017, staged a massive turn-around afterwards till May 2019.
Financial Vanguard analysis of the CBN report shows that investment in CPs fell by 95 percent to N0.52 billion in December 2017 from N9.8 billion in 2014, but it rose by 6,275 percent to N33.15 billion at the end of May 2019.
The contrasting performance of banks’ investment in BAs and CPs, according to analysts, reflects the impact of stringent condition imposed by the CBN on BAs and the impact of slow economic growth on businesses. They also noted that the decline will persist until a clear recovery and growth returns to the economy.
Restrictions on BAs
In 2009, the CBN, in an effort to curb abuse of the two categories of financial instruments, banned their use for off-balance sheet items.
The apex bank, in a circular, stated: “The abuse ranges from repackaging of troubled assets into CPs/BAs for purported sale to other institutions, non-existence of underlying transactions for the CPs/BAs, and frequent rollovers beyond the allowable tenor. In addition, CPs and BAs are often used as the instrument of choice for raising liquidity in an attempt to conceal the extent of dependence on the Inter-bank market for banks funding needs.
“Consequently, the sell-down of BAs and CPs as off balance-sheet instruments is hereby suspended with effect from the date of this circular. All maturing CPs and BAs are to be either fully liquidated or treated as on balance-sheet items.”
In addition to the above, the CBN introduced guidelines aimed at ensuring uniform practice and correct treatment of BAs and CPs by banks and discount houses. A major highlight of the guidelines was the restriction of BAs to trade related transactions as well as ban on use of BAs to finance service related transactions.
The guidelines stated: “Every BA shall have an underlying trade transaction for which the bank should hold the title documents to the merchandise as collateral for the acceptance. These documents shall be available for Examiners’ scrutiny.
“Unless otherwise specifically provided for in these Guidelines or approved by the CBN, the “sale” or “purchase” of services shall not be eligible for BA financing.”
These restrictions, according to Ada Ufomadu, Senior Analyst, Financial Institutions Ratings, Agusto & Co, are responsible for the persistent decline in banks’ investment in BAs.
She said: “There have been more issuances of CPs than BAs because of less stringent requirements in issuing CPs. With BAs, banks will need to guarantee that the company raising capital will pay back. Therefore, there will be higher scrutiny, collateral requirements and so on. It’s almost like taking a loan. The credit risk here is lower and interest rates will be lower as well.
“However, for CPs, it’s more straightforward, no company is guaranteeing any other company. The risk is higher and interest rates will be higher as well.”
Noting that the decline in BAs is negative for the industry and likely to persist going forward, Ufomadu said: “The decline in BAs is not a positive development, it’s actually a negative because BAs have lower credit risks compared to CPs. As long as companies need capital to meet short term obligations, CPs will continue to be issued. So, yes the increasing trend of CPs will continue and BA issuances may remain moderated.”
Similarly, Bunmi Asaolu, Head, Equities, FBNQuest said: “The decline is due to CBN’s policy on revised definition of what is acceptable as BA in reporting. In the past banks used to take advantage of this product to hide NPLs (non-performing loans) and also to reduce capital charge as well as AMCON charges.
“CBN issued (a few years back) a circular on what is acceptable as BA which partly blocks the loophole for banks using it to repackage NPLs. Also, the inclusion of off balance sheet items, BA included, as part of total assets for AMCON levy also defeats the purpose.”
Asaolu also confirmed that the decline in BAs will persist further though it’s a positive for the industry in terms of curbing bad loans.
“It is probably positive because it prevents banks from using BAs as a way to accommodate bad credits/Non Performing Loans. Since this trend resulted from the CBN putting out a circular to make BAs less attractive, unless something changes, the situation is likely to remain unchanged”, he said.
Banks, however, attributed the decline to reducing interest in trade financing due to the recession and slow economic growth.
Speaking under condition of anonymity, a top official of a Tier-1 bank, who said his bank has not issued any BA since 2010, said: “The decline in the processing of Bankers’ Acceptance (BA) can be associated with the reducing interest of banks in the trade finance transactions. The low supply of funds is a potential risk which could cause reasonable likelihood of providing funds when obligation falls due.”
Explaining further, Kunle Ezun, a research analysts with Ecobank Nigeria, said: “One major reason for the decline is the performance of the economy. BAs are a type of short term funding instruments used by corporate organisations for trade-backed transactions.
“The unique selling point is that it has to be backed by an underlying trade transaction. You will recall that the economy went into recession in the second quarter of 2017. Thereafter, the economy has struggled to recover with marginal GDP growth. The sharp drop in BAs investment is largely due to the poor performance of the economy.
“On the flipside, it could be as a result of the import substitution and export promotion strategy of the Federal Government.
“The Federal Government has a deliberate policy to reduce foreign trade transactions with home grown options. You will recall that about 43 items are restricted from accessing forex from the official window.”
Ezun further noted that though the development is negative for the economy, it would likely persist until there is improvement in the nation’s economic growth.
He stated: “If the sharp drop in BA investment is a reflection of the economy, it is convenient to conclude that is a negative for the industry and the economy. It shows a downturn in our international trade.
“With the ongoing CBN monetary and foreign exchange policy, I think the trend will continue throughout the life of the current government. The recent remarks by the President, that CBN should stop providing access to forex for food importation come to mind.”