Interest Rate Hike: Banks Risk Losses To Higher Non-performing Loans

Non-Performing Loans (NPLs) in the Nigerian banking industry is expected to rise as the hike in Monetary Policy Rate triggers a rise in interest rate, the pesident of Association of Capital Market Academics of Nigeria (ACMAN), Professor Uche Uwaleke has said.

Uwaleke, while speaking at the bi-monthly forum of Finance Correspondents Association of Nigeria (FICAN) noted that as banks adjust their interest rate to align with the new benchmark rate, it will become increasingly difficult for borrowers to repay their loans.

The governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, had, at the last MPC meeting held this month, noted the reduction in the Non-Performing Loans (NPLs) ratio to 4.95 per cent in June 2022, compared with 5.7 per cent in June 2021. The MPC, had urged the apex bank to sustain its tight prudential regime to ensure that the NPLs ratio is brought well below its prudential benchmark.

The MPC had also raised benchmark interest rate for the second time this year to 14 per cent, a move the professor of Capital Markets noted will translate to higher interest and the higher the inability of customers to pay back their loans.

Following the 150bps rate hike in May which brought the MPR to 13 per cent from 11.5 per cent, banks had readjusted their lending rates. Lending rates before the rate hike in May this year hovered between 12 and 40 per cents but as at July 15, lending rates was between 12 and 44 per cents in the banking industry.
According to Professor Uwaleke, a higher MPR would mean that borrowers will have to pay more to the banks.
“The more you increase the (MPR), the likelihood that the asset quality of banks will even deteriorate. In the last MPC communique, we were told that the non performing loans of banks have dropped to below the CBN threshold of five per cent.
“The MPR is the rate at which the central bank lends to commercial banks and we have a corridor of +1/-7. So that means effective lending rate is 15 per cent.
“So, if the interest rate is 15 per cent, banks of course cannot lend at below 15 per cent, it has to be higher, with the cost of doing business that is also rising. That is why you also find that banks are shifting all these things to their customers and those who are borrowing.
“You now find that lending rates will be higher as the banks now reprice their loans, and the likelihood that borrowers will default will also be higher. And that’s why increasing the monetary policy rates may lead to an increase in the non performing loans of the banking industry.
Uwaleke also noted that the higher MPR would mean the cost of government servicing its domestic debt obligations will also increase.
The cost of borrowing by the government is also influenced by the MPR and the higher the MPR, the higher the cost of borrowing by the government. That is why on the fiscal side, the fiscal authorities will not support frequent increase in the MPR.
“But the central bank has a duty to tame inflation. So, that is why inmost economies central bank is meant to be independent. Otherwise the fiscal authority may want to keep interest rates low MPR so, they can borrow at a cheaper rate. So raising the MPR will increase cost of borrowing. And that will mean cost of establishing domestic debt will of course increase.”