Rising Consumer Credit Default Rate Insignificant to Drag Banks Assets Quality
Analysts have said that increased default rate in consumers credit line is insignificant to drag banking sector assets quality.
At the last count, consumers credit trend below 9% of the private sector credit, thus explained why analysts think it may be immaterial to banking industry’s asset quality.
Many banks have created consumers credit to support retail banking earnings, partly to beat instant credit vendors activities.
Rising trend of quick credits services posed threat to future of banking in Nigeria, but many commercial banks have been on reactive sides.
The industry has witnessed a number of partnership in payment system and mobile banking services to stay ahead of the curve.
But consumers’ credit remain quiet risky, due to both cultural attitude and weak macroeconomic situation, thus making loans to individual susceptible to default.
At various earnings call with analysts, many banks debunked potential threat to consumers’ credits portfolio.
In a recent report by the Central Bank of Nigeria (CBN), consumer credit declined 6.7% month on month was with aggregate consumer credit now at N1.43 trillion at the end of August 2020 from N1.47 trillion in July 2020.
Nevertheless, on a year on year basis, consumer credit expanded 27.3% from N1.12 trillion in August 2019.
In addition, the ratio of consumer credit to aggregate private sector credit was down to 8.4% in August 2020 from 8.7% in July 2020 but higher than August 2019’s 7.4%.
CSL Stockbrokers said in a note that the year on year expansion in consumer credit is reflective of CBN’s aggressive policy measures geared at improving credit access and cost to the overall economy.
Last year, analysts recalled that the apex bank announced an increase in Loan to Deposit ratio to 60.0% and later adjusted it higher to 65.0%.
As part of the policy, the CBN stated that certain sectors (inclusive of consumer credit) would be weighted higher in the calculation of the ratio.
However, CSL Stockbrokers said with the advent of the covid-19 pandemic, default rates on these loan categories have risen sharply.
Consumers and small business owners who fall within this category have seen income decline significantly on job losses, wage cuts and poor demand.
Read Also: Banks Debtors in Trouble as CBN Activates Inter-bank Debits
Thus, it has become difficult to service their loans.
As a result, analysts said banks may have tried to reduce their exposure to consumer credits or may have made their qualification processes more stringent which may account for the two consecutive months of decline in consumer credit.
“In our view, with consumers handicapped by lower purchasing power as well as increasing vulnerabilities of small businesses to macroeconomic and business environment fragilities, some proportion of consumer credits will remain susceptible to default.
“Nevertheless, we do not expect increased default from this category of borrowers to significantly drag overall banking sector asset quality given such credits make up just 8.4% of aggregate private sector credit”, CSL Stockbrokers said.
Rising Consumer Credit Default Rate Insignificant to Drag Banks Assets Quality
