2020 loans: Banks, customers clash over hike in interest rate
…blame inflation, multiple risks on business not banks — Analysts
…CBN member calls on orderly withdrawal of forbearance on restructured loans
By Ariemu Ogaga & Matthew Denis, Abuja
Banks and customers are in collision course over plans to hike interest rate on loans accessed in 2020, reliable sources in leading Tier-1 banks hinted Nigerian NewsDirect on Sunday.
The banking sector in 2020 witnessed cut in interest rate on loans granted and adopted forbearance in a move to cushion the effect of COVID-19 lockdown on global economy.
The sources explained that banks are now making moves to increase interest rate on those loans but customers are trying to resist amid rising interest rate that justifies the move by banks operating in the country.
According to the source, “the Pension Fund Administrators (PFAs), asset management firms, insurance companies, among others who place fixed term deposits with banks are asking for eight to 12 per cent interest rate from banks for fixed term deposits depending on the tenor of the deposit and the perception of risk of the bank
“Even one year treasury bill now yields about 10per cent.
“So, if CBN and the Federal Government are borrowing at 10 per cent for a year tenored instrument, why will banks still lend to a 3-year money to a ‘risky’ customer at 12 per cent, which was the case last year when Treasury bill and Bond yields were in single digit.
“They have to increase lending rate in line with increase in interest rate environment.”
The Central Bank of Nigeria (CBN) had reduced the interest rates on its intervention facilities from nine per cent to five per cent per annum for one year effective March 1, 2020, as part of measures to mitigate the negative impact of COVID-19 pandemic on the Nigerian economy.
On March 3 this year, the apex bank announced that it had extended the forbearance by another 12 months to February 28, 2022, stating that: “The role-over of the moratorium on the credit facilities shall be considered on a case by case basis.”
Analysts have blamed banks’ hike on interest rate of existing loans on inflation and revealed that the situation may lead to multiple jeopardy for businesses operating in the country.
An economist and senior Lecturer, Lagos Business School, Dr Adi Bongo expressed that double digit inflation, among other factor tend to compel banks to increase interest rate on loans borrowed last year.
He explained that there is a one-to-one relationship between inflation and interest rate, noting that when inflation rises, it also affects the value of banks’ assets.
“We have to blame inflation not the Bank, it is not the problem of the banks, if inflation drops same will be interest rate,” he said.
He noted that this can be addressed by CBN, intervention through the placement of cap on interest rate in order to protect the real sector.
He also said part of the inflation is caused by insecurity and COVID-19.
According to him, “Insecurity contributes the highest to inflation affecting the prices of food due to destruction of supply chain, manufacturing and herdsmen/farmers conflict, banditry and Boko Haram.”
He disclosed that except the insecurity in Nigeria is addressed, the situation would remain unchanged.
The Vice President , High Cap Securities, Mr. David Adonri, said it is inevitable for banks not to increase their interest rate on loan due to the imbalance caused by inflation.
Putting the issue into perspective, he said, “Bank loans are of different types. There is fixed interest loan usually charged on term loans and there is variable interest charged on overdraft. Whether fixed or variable interest, the terms and conditions of the loan will expressly state whether interest is fixed or variable.
“Whenever the term states that interest is variable, it means the interest rate on the facility will change in line with short term benchmark rate in the economy.
“However, it may be inevitable for correcting short term economic imbalance especially to subdue inflation,” he said.
He, however, noted that high interest rate environment is unhealthy for the production economy.
David advised that, “Borrowers who are troubled by current rise in lending rate can renegotiate the terms of the facilities or accept the change if possible. Borrowers may also need to explore non-bank debt financing options like Commercial paper and Bonds.”
The former Director-General, Lagos Chamber Commerce & Industry, Dr. Muda Yusuf, said the situation may be a case of multiple jeopardy for businesses in Nigeria.
He said, “Purchasing power is weak, exchange rate has depreciated sharply, there is forex market illiquidity, the cargo clearing at our seaports is a nightmare, security situation has inflicted an elevated risk to investment.
“The high cost of fund is taking a huge toll on operating and production costs across sectors. It is a case of multiple jeopardy for businesses, especially those with highexposure to lending institutions.
“The consequences are that sales are dropping, inflationary pressures will intensify, profit margins are being eroded and industrial capacity utilisation will drop.
“The added cost would be passed on to consumers and end users, as far as possible. This would imply an added pressure on general price level which typically exacerbates the poverty in the economy.
“Growth is still fragile and unemployment level is still quite high at 33.8 per cent. This calls for the sustenance of economic stimulus to accelerate output growth. The uptrend in interest rate is not consistent with the growth and job creation objectives of government,” he stated.
Speaking from a different perspective, the President of National Association of Microfinance Banks (NAMB), Yusuf Ahmed Gyallesu in a chat with our correspondent supported the move by banks to increase interest in loans granted to customers in 2020.
He noted that accessing funds from the surplus to end petty traders’ becoming more difficult due to the economy downturn.
He made the disclosure during a telephone chat on Sunday evening with Nigerian NewsDirect while reacting to the allegations of persistent increases of interest rates.
According to him, “Banks are just intermediary, we take loans from those have excess funds which is the surplus unit and give to those that don’t have which is the deficit unit.
“So, taking funds from the surplus unit fixed deposits and savings with the banks and even current accounts banks are asked to charge small interests. When you aggregate the costs these three sources of loans and some banks might not even have enough which they have to go and borrow with interest to lend to these Customers as loans.
“When you aggregate these sources the banks will ensure that the interest rate on loans covers all these costs of sourcing the funds and then putting more spread.
“Assuming these cost is 15 per cent when you add administrative cost including the forms and documents as a rational businessman you will ensure that the interest to cover the loans for clients is not less than 15 percent as not run at a loss.”
The NAMB President stressed that with the situation of the economy it’s very difficult even sourcing for these funds from the surplus unit.
He said, “Anywhere you are going to source for these funds it is going to be expensive thereby hiking the interest on loans for end users is a result of the interest rate and conditions from the surplus and lenders must not run at a loss too.”
Meanwhile, despite the banking sector’s Non-Performing Loan (NPL) ratio falling to 5.9 per cent in April from 6.0 per cent in March this year, a member of Monetary Policy Committee (MPC), Professor of Economics, University of Ibadan, Festus Adenikinju, in his personal statement stated that, “There is a need for timely and orderly withdrawal of forbearance on loan restructuring granted to the banking sector.
“The growth in aggregate credit indicates that the CBN policy on Loan-to-Deposit Ratio (LDR) is working, and defaulting banks should be encouraged to keep to the LDR.
“The various intervention programmes of the CBN are already providing strong support for the youths, women, and those who could not readily access formal credit market.”
