As a result of rising cases of bad loans, the Central Bank of Nigeria (CBN) recently announced a new measure to check loan defaulters. Under the new rule, the apex bank has introduced a credit protection clause that will enable banks to use bank deposit of debtors in any bank for loan repayment.
The measure, which was part of the resolution of the recent Bankers’ Committee meeting held in Lagos, came two months after the Federal Government set up a special task force to recover the N5 trillion debt owed the Asset Management Corporation of Nigeria (AMCON). However, the new measure applies only to fresh loan offers. Henceforth, the offer letter given by Deposit Money Banks to customers intending to borrow will have a clause containing their Bank Verification Number (BVN) and Tax Identification Number (TIN) where they are required to sign that their deposits in other banks can be seized for the settlement of the loan. According to the Deputy Governor, Financial Sector Surveillance of CBN, Mrs. Aisha Ahmad, the measure will make the banks comply with the CBN’s directive on Loan to Deposit Ratio (LDR) of 60 per cent which takes effect from September 30, 2019. The new LDR guideline is to boost lending to the real sector of the economy.
Defaulting banks will face stiff sanctions, which include a reduction in the Cash Reserve Ratio of the bank with the CBN. Currently, the flat loan to deposit ratio is 57 per cent, and is considered low to make the required impact in the real sector of the economy. The audited financial statements of the Deposit Money Banks listed on the Nigerian Stock Exchange (NSE) showed that nine of them boosted their loan books in the first half of the year, but only seven had a loan to deposit ratio of over 60 per cent as of June 2019.
Undoubtedly, the new rule will enhance the willingness of banks to provide credit to Small and Medium Enterprises, and others. Currently, banks are reportedly unwilling to lend, largely because of the increase in unpaid loans by customers, thereby leading to rising non-performing loans. For instance in 2018, the banking sector accumulated N1.79trillion as NPLs. In 2017, gross loans in the banking industry stood at N15.96trillion. It further revealed that N2.36trillion of the 2017 figure was Non-performing loans, while N14.12trillion accounted for other loans.
We commend the CBN for the new policy expected to check bad loans in the banking sector. We also urge the banks to ensure that it is seamlessly implemented. Although there are many honest Nigerians who would be willing to repay their loans, there are some that would not pay.
To complement this exercise, it is heartening that the Bankers Committee has concluded plans for a credit scoring system that would enable customers with good credit history to easily access loans. We believe that the new policy would not only encourage retail lending by commercial banks, but it would also deepen efforts by banks to boost consumer credit in the economy.
It is encouraging that the CBN and other lending institutions have agreed to use the bank savings of customers that default to repay the loans. In the past, the level of indebtedness to the banks led to the collapse of some banks. Now, with loan defaulters to lose deposits in other banks, the banks will focus more on their core role. However, one issue that must be addressed is how to ensure that bank accounts of borrowers are funded. In a situation where borower’s accounts are well-funded at the point of securing loans, only to be drawn dry later will defeat the effort when there is default. It is only funds in banks accounts that could be sieze to pay for loan. If there are no funds or deposit, nothing would be used in lieu of the loan.
The fact that commercial and industrial borrowers are the second largest users of bank loans after the real estate borrowers makes it necessary that strict guideline be set for the borrowers to ensure that they do not renege on loan repayment. Considering the importance of the banking sector to the economy, the credit protection clause will do much to check loan default.