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Why Banks May Shun CBN’s Interest On Agric Lending



MARK ITSIBOR writes that the excitement over recent Central Bank of Nigeria (CBN’s) call on deposit money banks to lend to the real sector at an all-in interest rate/charge of 9 percent per annum may soon be dampened by the reality of unwillingness of the banks to stake their reserves for unsecured, cheap loan

If most Nigerian deposit money banks practically refuse the invitation by the Central Bank of Nigeria (CBN) to grant Credit facilities to greenfield (new) and brownfield (expansion) projects in the real sector (Agriculture and Manufacturing) anytime soon, it is not because they wouldn’t like to earn interest on idle reserves in CBN, but because they would not want to venture into unsecured investments that are likely to increase their Non-Performing Loan profiles. The reservation is premised on the fact that there is no risk sharing – the risk still resides solely with the banks, so should they lend to projects that fail, they will still have to bear 100 per cent write off for such loans.     

The central bank recently announced that it has put in place a programme under the Differentiated Cash Reserves Requirement (DCRR) Regime whereby deposit money banks interested in providing Credit Financing to greenfield (new) and brownfield (expansion) projects in Agriculture, Manufacturing and other employment stimulating sectors of the economy could request for the release of funds from their Cash Reserve Ratio (CRR) to finance the projects. According to a guideline by the central bank, for that to happen, the deposit money banks would have to provide verifiable evidence that the funds shall be directed at the approved projects by the CBN. Upon the approval of the loan by the apex bank, the commercial banks are expected to disburse the loans within five working days to the right beneficiaries.

The bank’s spokesman, Isaac Okorafor said the Differentiated CRR would have a minimum of seven years tenor, with a two-year moratorium. 

That is different from the Corporate Bonds (CBs) Programme. Under this programme, the CBN and the general public have the opportunity to invest in CBs issues by corporate organisations, subject to the intensified transparency requirement for Triple A-rated establishments that involves the publishing through printing of Information Memorandum of the details of the prospective projects for which the funds are required. Mr Okorafor said the tenor and the moratorium would be specified in the prospectus by the issuing corporate.  He added that the maximum facility is N10 billion per project and facilities are to be administered at an all-in Interest rate/charge of 9 per cent per annum.

The basic aim is to improve access to affordable finance to the manufacturing, agricultural, and other sectors that are employment and growth stimulating to the economy and stimulate growth in employment elastic sectors to further enhance Nigeria’s import substitution strategies.

Expectedly, President of the Manufacturers Association of Nigeria (MAN), Mr Frank Jacobs and National President Rice Farmers Association of Nigeria (RIFAN) Alhaji Aminu Goronyo have long expressed delight over the new program, describing it as a welcome development, even as they said the ideal rate is 5 per cent interest loan for the manufacturing wing of the economy.

For about four years, MAN has been pressing government to come up with a special window for the manufacturing sector to be able to access funds on a long time basis and at a single interest rate. In as much as their ambition was not fully met, Jacobs says “something is better than nothing. We think it’s a great step by government in trying to make long-term funds available to the manufacturing sector that would provide employment and create wealth. …these are two important sectors to drive the economy. We are happy about it.”

Goronyo is also optimismic that the policy would help improve production of other agriculture commodities in the sector. That is also the expectation of the National President, Women Agro Allied Farmers Association Mrs Lizzy Igbine agreed that the nine per cent lending rate would encourage farmers to increase production.

  “ It will go a long way to help us but we hope there won’t be any hidden rates or charges that farmers will pay after taking the loans,’’ she said.

President of National Cashew Association of Nigeria (NCAN) Mr Tola Faseru appealed to the CBN not to allow the policy to be a `lip service’.

Faseru, who said it was not the first time the CBN was directing commercial banks to lend to agriculture, noted that most banks had not complied with such directive.

Like Oliver Twist, the operators in the real sector think the CBN should have raised the stake by reducing the interest rate and create more facilities for the sector. Like Jacobs who feels that the maximum N10 billion allowed per project is too little, Faseru also says “the CBN still has to do more,” adding: ““We are asking for as low as five per cent. “Our hope is that the funds would be increased as time goes on,” Jacobs said in affirmation in an interview with me.

Mr. Okorafor who advocated for a total compliance with the guidelines by stakeholders, reiterated the CBN’s determination towards the encouragement of projects that will further enhance Nigeria’s import substitution strategies. The CBN promised to reduce its reserve requirement as part of efforts to make the programme attractive to the banks. What impact does that make?

There are strong indications the banks will likely not embrace the programme based on obvious reasons. Industry experts say however potentially profitable for banks to invest idle funds as the CRR in single digit ventures, many would prefer earning nothing on safe reserves than take the scaring risk of investing in uncolaterised 5 to 7-year projects. The fear is that the programme does not in any way guarantee return on investment in the real sector considering the fact that cost of production is regressively high, with double digit inflation rate, especially as the country goes into election period.

Findings by LEADERSHIP revealed that interactions with top management staff of some of the banks suggest that most of the banks are actually reluctant or afraid to patronize the scheme for fear that it would increase the already high Non-Performing Loans profile of the banks. At the last count, the non-performing loan ratio has steadily rise in recent time – from 4.4 per cent and 12.8 per cent in 2015 and 2016 respectively, the NPLs figure has risen to an alarming figure of 16.21 per cent. “Will the banks stake their precious Cash Reserves with unsecured and “unattractive” investments despite the current levels of Non-Performing Loans across the bank books?,” asked a spokesman of one of the second tire banks who asked not to be named, when our correspondent enquired of the position of the bank on the issue.

The CBN had in January 1998 established the Credit Risk Management System, a public credit registry operated by the apex bank that allows banks to report and check up on all credits above N1 million.

Apart from that, the banks also have the option to invest in secured Federal Government (FGN) Bonds and Treasury Bills (TBs) that have coupon yields of between 12.75 and 13.53 per cent. The popular argument is that investors would prefer to invest their money in risk free assets that will allow them earn guaranteed returns which prices higher than the current inflation rate.

He said that is the more reason players in the sector kept calling for a holistic approach by the central bank in their serial complains about the high Treasury Bills rate, as well as interbank rate, which is equally very high. “If they can reduce the MRI, the initiative could work. These are the things we see as dislocations in the policies that make them unworkable. If they have an alternative – where they can invest their money and get up to 13.5 per cent, why would they give it to somebody else at 9 percent? Unless there is any other incentive from CBN that would attract them to doing this, it would be difficult,” he said, adding that the association merely hopes that the authority immediately finds a way to compel the banks to comply.

As a matter of sincerity, many, including members of the benefiting MAN would note throw their funds into an uncertain investment without an official backup by the regulatory authority. Jacobs told me that “If I were the banks I will not.” That alone is one of the factors that cause dislocation to the entire system.

Managing director and chief executive of Cowry Assets Management Limited, Johnson Chukwu is one of those who share the believe that despite the fact that the banks may be willing to make use of the idle funds with the central bank to earn profit and grow their earnings, they may be constrained by other factors. He said: “The reason they will not want to lend is that there is no risk sharing. The risk still resides solely with the banks, so should they lend to projects that fail, they will still have to bear 100 per cent write off for such loans.”

Chukwu shares the sentiment of some of the bank CEOs who do not believe there is any reason to invest the idle funds in risky projects. Chukwu stated that the programme is not a risk sharing initiative and because the risk still resides with the banks, the banks are not likely to be very bullish is releasing their funds to the desired sectors. “They (banks) will rather live with a zero income than loss of principal,” he said.

But beyond that, there are clear indications that the banks are not likely to increase lending this year as the country moves into a political era. Many of the banks have said the coming elections present them with so much of uncertainty, pointing to the possibility of change in policies should there be a change of government in 2019.

As aptly put by Chukwu, the key thing about lending is the fact that nobody wants to give out their financial resources at such periods when you are not sure of how the environment is going to remain after the elections. It is just a natural defense mechanism that financial institutions adopt.

Economist, investment research analyst at Cordros Capital Limited, Peter Moses could not disagree with him. Mr Moses opined that as long as the underlying factors that impede growth of business activities in the country are not addressed, banks would continue to be wary of increasing lending.

“Deposit Money Banks (DMBs) are largely aware that the high cost of doing business in Nigeria, elicited by infrastructural decay, multiple taxation, land ownership structure, enforcing contracts, inter alia, more than anything else, significantly increases the risk of loan default.

“We believe DMB’s risk averseness to credit creation will continue to play out, at least in the short term, considering still-attractive returns on government securities,” he stated adding that “it is rather difficult to accurately assess the potential impact of that without further details and framework cum modus operandi.”

That pose serious threat to implementation of the programme. As it stands, the central bank is yet to put down any sanction against any defaulting bank on this initiative. But Jacobs believes that “if they (CBN) come up with a firm policy statement, those that fail to heed the directive or go contrary to the policy should be sanctioned. I believe they will do that.”

Mr Okorafor who advocated for a total compliance with the guidelines by stakeholders and also highlighted the eligibility criteria for participation in the facility/CP programme, said the initiative is part of the CBN’s determination towards the encouragement of projects that will further enhance Nigeria’s import substitution strategies.

But the general believe is that the CBN can only prove its determination to help the real sector of the economy to grow in this regard by putting some strong and workable measures that will compel the banks to comply with the directive. For instance, President of National Cashew Association of Nigeria (NCAN) Mr Tola Faseru said the CBN should put a mechanism in place to check compliance by commercial banks. “We trust that they will be able to follow through to ensure that the policy is implemented by the commercial banks; it will go along a way to help us grow the agriculture and indeed the export sector,’’ he said.

Jacobs thinks it is a challenge that is surmountable. That is why he is optimistic that the employment stimulating initiative is realizable.

“If CBN is ready to wield the big stick on deposit money banks that would refuse to comply. If they are ready to make it work, the CBN can make it work – because they can sanction banks that fail to implement the directive.” He is in the same page with his counterpart in the farming industry. Goronyo has quickly called for prompt monitoring of the Commercial Banks to guarantee effective implementation for commercial famers to have the opportunity to reap the full potentials of the programme.

On the flip side, there are also concerns that some of the banks will likely play smart on CBN – access the funds and divert same to more profitable and secured ventures. There are reports of abuse of the CBN’s adored Anchor Borrowers’ Programme, with allegations that some banks that collected money from CBN for onward disbursement to farmers either withheld or converting the funds to personal use.   

Deputy Governor, Economic Policy in the apex bank, Dr Joseph Nnanna had blamed the inability of Deposit Money Banks to lend at single digit interest rate on the attractiveness of treasury bills, an instrument used by the government to borrow from the money market. Like many experts, Nnana believes that it would be difficult to achieve a single digit lending rate when government is borrowing from banks at an average rate of 18 per cent. This lends credence to the thinking that there may not be funds to release to the nation’s real sector under the said arrangement.

The CBN has been able to achieve that feat in the CBN-initiated Anchor Borrowers Programme (ABP), a development finance initiative of the bank that was launched in 2015. The programme is currently in operation in about 27 respective states of the federation.

Prior to introduction of the single digit interest loan facility by the central bank to the farmers, the nation’s rice production was between 2 million and 3.5 million tonnes per annum. Currently, the commercial rice farmers say they now produce about 9 million tonnes of rice due to the CBN intervention. “I am sure it will be the same for other commodities that will enjoy this intervention,’’ Goronyo said.




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