The work of a bank is to ensure money/credit flows for the benefit of the economy. As the economy grows more money/wealth is created and this wealth will only help to make the banks wealthier. At least that is how things are supposed to work, theoretically. That was what we were taught in school.
But that doesn’t seem to work in Nigeria.
Nigerian banks would rather fund depreciating assets over wealth generating assets. Because of “risk management”. But even when you manage risk, some kind of logic should drive the process. But no, our bankers are “Soldier go, soldier come”. They do things according to product papers – they don’t seem to understand that every credit has a unique DNA.
So why am I ranting?
This week, I got an offer for a personal loan from a Nigerian bank (name withheld since they are all the same) at a rate of 27.5%. Now the interesting thing is that I had a collateral that was with the bank. A Federal Government of Nigeria Treasury Bond. And guess what? The loan value was just 30% of the Bond value! So even if I default on interest and principal, the bank can comfortably sell the bond, get their money back and give me my change, which would tally up to at least 65% of the Bond value. Let me rephrase that: if i defaulted on the loan without paying a dime, the bank can sell the bond and will still end up giving me back at least 65% of the bond. Now, I am sure you understand why I emphasised that. Despite this security, the bank priced the loan at 27.50%.
There is another twist to the story. This same bank offered me an auto loan, or a car loan. The loan states that I can make 10% down payment on the car and pay the remaining 90% over 4 years. Guess the interest rate on the auto loan… 16.50%! That is like 11% lower than a personal loan guaranteed by a security that is guaranteed by the full faith of the Federal Government of Nigeria.
Let me put this in perspective. A car is a depreciating asset. The FGN bond is an income generating asset. It will take not less than three weeks to get a buyer for the car. It will take less than one minute to get a buyer for the bond. Yet, my bank feels safer using the car as a collateral than the FGN bond.
This is why I said…
…our bankers have gone mad again.
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Obi nna get your facts right. Technically speaking, you TBILLS is not with the bank and they cannot even sell it. It is also with a custodian who you have paid fees to and can also direct to route the proceeds of your investment to another bank (if you wish). The auto loan is a product which has its pricing and it’s fixed. Having a treasury bill and getting a loan based on it is a discretionary service by the bank which they can decide to withhold. World over, that is the standard. If your regular account happens to fall into debit, please be prepared to pay 45% interest.
That is not true. You can use your T-Bills as collateral for a loan.
I generally notice that banks like giving loans for ‘wasting assets’ than ‘productive assets”.