BANKS are yet to adjust their lending rates downward to reflect the sharp decline in treasury bills yields occasioned by the excess liquidity. The excess liquidity was triggered by the exclusion of local investors from OMO bills late last year.
While data from the Central Bank of Nigeria (CBN) indicates little or no change in lending rates, the banks, however, claim they have significantly reduced their lending rates.
On the other hand, the organised private sector operators disagree in their assessment of changes in banks’ lending rates in the last one year.
Financial Vanguard analysis revealed 842 basis points (bpts) decline in yields on Nigeria Treasury Bills, NTBs, year-on-year, between February 2019 and February 2020, driven by excess demand occasioned by the exclusion of local investors from participating in Open Market Operation (OMO) for NTBs.
Consequently, yields on 91-Days, 184-Days and 364-Days NTBs, fell by 797 bpts, 890 bpts and 841 bpts to 3.0 percent, 4.5 percent, 6.45 percent respectively as at February 21st 2020, from 10.97 percent, 13.4 percent and 14.95 percent in February 2019. This translated to average decline of 842 bpts within the one year period.
In sharp contrast, the average maximum and prime lending rates of banks remained relatively stable, with marginal decline of 68 bpts and 146 bpts respectively.
According to the latest CBN Quarterly Economic reports, the average maximum lending rates of banks fell slightly to 29.98 percent in the fourth quarter of 2019 (Q4’19), from 30.66 percent in the corresponding period of 2018 (Q4’18). Similarly, average prime lending rates fell to 14.99 percent in Q4’19 from 16.45 percent in Q4’18.
This marginal change is also reflected in interest rates charged by the top 11 banks on loans to the oil and gas, and the manufacturing sectors which accounted for 43 percent of banks’ loan book as at 31st September 2019.
The eleven banks are Access Bank, GTBank, First Bank, UBA, Zenith Bank, Union Bank, Stanbic IBTC, Ecobank, Fidelity Bank, FCMB, and Sterling Bank.
Financial Vanguard analysis of bank’s deposit and lending rates published by the CBN, showed marginal declines of 85 bpts and 25 bpts respectively in the average maximum lending rates for loans to the oil and gas sector, and the manufacturing sector.
But the average prime lending rate for loans to the oil and gas sector rose by 60bpts, though it decline marginally by 25 bpts for loans to the manufacturing sector.
Further analysis, however, shows a narrowing of gap in rates between Tier-1 and Tier-2 banks with divergent movement in the average maximum lending rates charged by the banks, where the former trended upwards while the later went down. But Tier-2 banks’ rates remained higher.
For the Tier-1 banks, namely Access Bank, GTBank, First Bank, UBA, Zenith Bank, the average maximum lending rates for loans to the oil and gas, and the manufacturing sectors rose by 70 bpts and 50 bpts respectively to 28.5 percent and 27.9 percent in February 2020 from 27.8 percent and 27.4 percent in February 2019.
For the Tier-2 banks, namely Union Bank, Stanbic IBTC, Ecobank, Fidelity Bank, FCMB, and Sterling Bank, the average maximum lending rates for the oil and gas sector dropped by 240 bpts to 31.5 percent in February 2020 from 33.9 percent in February 2019. Their average maximum lending rate for the manufacturing sector dropped marginally by 25 bpts to 29.5 percent in February 2020 from 29.75 percent in February 2020.
Marginal declines
The marginal declines in banks’ lending rates, according to Professor Mike Obadan, a member of the CBN’s Monetary Policy, reflects unwillingness on the part of banks to reduce lending rates.
Stressing that the high lending rates charged by banks, in spite of the low interest rate regime in the fixed income market, could impede efforts to increase lending to the economy, he called for measures to compel banks to lower their lending rates.
In his personal statement at the last MPC meeting held in January, the Professor of Economics and Board member of the CBN stated: “The liquidity build-up continues as long as the OMO bills held by these agents mature. Monetary policy stance would need to take cognisance of this factor. The above policies have led to the crash of deposit rates, particularly, term or fixed deposit rates which are now even less than the savings rates in most cases. “But the data do not show the lending rates as crashing in a similar manner, thus leaving the spread between the lending and savings rates even wider than before. Commercial banks have no reason to maintain very high lending rates in the face of exploitative low savings rates.
“They would need to be compelled to do the needful; otherwise they are undermining the essence of the policies. In other words, the very high rates have adverse implications for financial intermediation and effectiveness of monetary policy transmission channels.”
His comments were, however, contradicted by the Acting Managing Director/Chief Executive, Coronation Merchant Bank, Dayo Adegbohungbe, who averred that banks have significantly reduced lending rates.
“From our experience actually, the reverse of what you said is what we are experiencing on the lending side,” he said.
Responding to Financial Vanguard while addressing the press on the sidelines of the Coronation Breakfast Session in Lagos last week, Adegbohungbe said: “It is true that deposit rates always adjust faster when there is a shift either downward or upward. So, deposit rates initially adjusted much faster and then lending rates adjusted significantly as well.
“If you talk to any corporate banker, they will tell you that their lending rates have dropped significantly from let’s say a year ago. And when I say significantly, I just don’t want to quote figures but I mean really significantly. Not only that, if you talk to bankers, talk to the treasurer, finance director or managing directors of any of these sectors, manufacturing, etc, ask them if their interest rates are the same as they were a year ago or eight months ago. They will tell you their rates have dropped and they are taking advantage of those rates to make investment decisions, those that they probably would not have made before the reduction in interest rate.
“But for SMEs that you talked about, when you look at the pricing, you know pricing is always risk based. It is true that you have a brand of pricing or maybe corporate may enjoy better pricing and the SMEs and Individuals are at the high end of the curve.
Overall pricing curve
“Then the overall pricing curve has shifted basically because everybody is trying to lend to the same group of potential obligors from a risk stand point and as a result of that, the leverage of pricing has really shifted from the banks to the customers.”
Members of the Organised Private Sector (OPS) were however divided in their assessment of change in the lending rates charged by banks.
While, Muda Yusuf, Director General of the Lagos Chamber of Commerce and Industry (LCCI) corroborated Adegbohungbe’s claim that banks’ have significantly reduced lending rates, Frank Onyebu, Chairman, Manufacturers Association of Nigeria (MAN) Apapa branch, differed, saying the reduction in lending rates is cosmetic.
According Muda Yusuf, “The lending rates have been significantly reduced especially for the corporate customers. Not necessarily for the small customers but for the large to medium customers. And lending rates have gone down though I can’t give you specific numbers now but the feelers I am getting is that it has gone down significantly.
“First, there is this LDR (Loan to Deposit Ratio) policy, which was increased to 65 percent. That has had significant effect. In fact I have seen some corporate customers telling me that banks are now chasing them with loans, they are going after them, to offer them credit so that they can meet up with the LDR.
“Then the fact that yields on NTBs have also come down, the kind of pressure that was generating on interest rates, that pressure has also gone down. So generally I think there has been a significant moderation in interest rates.”
Frank Onyebu however disagreed, saying, “The so called reduction in rates is mostly cosmetic because rates are still unrealistically high and highly toxic to business. Manufacturers Association of Nigeria has always advocated for a single digit interest rate for manufacturers. Anything short of this will put our members in perpetual disadvantage knowing we also have to grapple with the problem of electricity as well as other challenges.”