The Central Bank of Nigeria’s third quarter “Credit Conditions Survey” reveals widespread default is expected from loans across businesses.
The report which is Published quarterly by the Central Bank surveyed Lenders and bank staff, who were asked about trends and developments in credit conditions in the current and next quarters.
The survey is broken down into three broad categories;
- Secured and unsecured lending to households
- Lending to non-financial corporations
- Small businesses and non-bank financial firms.
The CBN also uses this survey as an input when carving out monetary policies.
According to its survey “corporate loan performance as measured by the default rates deteriorated in the review quarter and was expected to further deteriorate for all sized businesses in Q4 2016. Similarly, losses given default on lending to all size businesses deteriorated in Q3 2016.”
Most Nigerian companies are expected to report high profitability declines stemming from a fall in consumer demand, high cost of goods and servicing and poor liquidity in the economy. These all affect cash flow and the ability of small businesses to meet their loan obligations.
The CBN also reported that respondents also opined that loan applications from Household were also on the increase due to “brighter economic outlook and changing appetite for risk”. However, lenders reduced their loan approvals as they believed a lot of the applicants did not meet their credit scores.
In an apparent quandary, the survey also concluded that lenders were not willing to lend to borrowers with loan to value ratios of under 75% or over 75%.
In confirmation of what we have also observed, Lenders reported that the overall spreads on secured lending rates to households relative to MPR widened in Q3 2016 and was expected to further widen in the next quarter.
As expected, spreads on loans to small, medium size firms widened negatively impacting on the proportion of loan applications. Respondents also opined that this is expected to continue to reduce in the third quarter.
With credit increasingly becoming risky and thus reducing, the private sector is unlikely to be relied upon to jump start the economy. More businesses are likely to close while those who have loans could likely experience high default rates.
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