Uncertainties, High Lending Rate to Tame Retail Credit–Analysts
Steep borrowing rates and nosediving economic conditions would take retail credit growth in 2023. Some Nigerian banks have started recording growth in stage two loans, and this has also started to filter into stage three as private sector activities continue to face challenges.
Nigeria’s economic managers are fighting inflation with interest rate hikes on the presumption of strong liquidity rather than from a worsening cost side.
According to analysts, the Central Bank of Nigeria (CBN) has failed to meet its statutory responsibilities of lower prices and inflation levels to drive growth in the real sector of the economy.
For as long as this goes on, Nigerian banks would be net beneficiaries of a sustained increase in benchmark interest rates while the productive sector would continue to confront multi-faceted policy propelling economic challenges, according to LSintelligence Associates.
Nigerian deposit money banks are facing pressures emanating from growing problems from various segments due to a slowdown in economic prosperity. Fitch Ratings chart on stage two and three loan movement showed that retail lenders have become more exposed to default.
In reaction, MarketForces Africa gathered from Nigerian top bankers that lenders have started to tighten credit conditions in order to stem default rates from the highly exposed sector.
Nigeria recorded slowdowns in gross domestic product growth in 2022, spooked by worsening market indicators. With surging inflation, the monetary authority has maintained a strong fist on benchmark interest rates.
Unfortunately, money supply has been making an uptrend in addition to the Central Bank of Nigeria’s decision to normalise cash reserve ratio. Though the CBN continues to tighten interest rates, inflation has remained stubborn, peaking at 22.79% in June 2023.
Some Nigerian companies reported weak profits in the first half, a development that was triggered by losses on foreign currency transactions on their books.
With interest rates and inflation set to stay high for longer than anticipated by Broadstreet analysts, borrowers, and customers are increasingly accustomed to higher financing costs and prices.
This has started to reflect on prices of goods and services, keeping Nigeria’s inflation rate outlook elevated, according to LSintelligence Associates market research analysts.
Nigerians woke up to sudden economic reforms that saw subsidy removal, and foreign exchange rate reform in June without palliative measures in place for households with weak purchasing power.
Tight financing conditions under a higher interest rate environment geopolitical tensions and difficult domestic socio-political conditions erode credit fundamentals, according to analysts.
High interest rates and subdued economic activity have been putting pressure on some corporates’ performance. An upward adjustment in the average interest rate often reduces credit growth.
In the second half, companies in the fast moving consumer goods sector have started to activate survival strategies – downsizing, and price hikes – to maintain going concern identity.
However, due to a weak household and corporate demand, such adjustment could trigger a loss of market share, and erode corporate profits, LSintelligence Associates said in an email, adding that it is the only way to go.
While most measures of credit quality remain in good shape, analysts are expecting delinquencies and deposit money banks credit loss charges to rise toward historical averages following the naira devaluation.
Some Nigerian banks are expected to boost capital ratios by limiting pay out to support confidence and in anticipation of potentially strict banking regulations in the latter part of the year.
Nigeria’s inflation rate is expected to rise further, though monetary policy committees’ 25 basis points interest rate hike signals a possible intention to lose grip on rates.
Banks operating expenses have been expanding. Analysts said Banks are managing expenses by reducing discretionary costs, delaying certain investments in technology, and reducing headcount, which could help moderate expense growth.
While most measures of credit quality remain in good shape, delinquencies–particularly in consumer loans–are beginning to rise, Fitch Ratings said in an update.
MarketForces Africa reported that Nigeria lost its price stability advantage in August 2019 when the then government closed the border against an influx of foreign produce despite near zero productive advantages, #Uncertainties, High Lending Rate to Tame Retail Credit–Analysts