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Financial
experts are of the opinion that the recent tightening of the nation’s
monetary policy rates could worsen the already poor state of private
sector lending, given the persistent liquidity tightening that the
nation has been experiencing since banks started addressing their ‘red’
books last year.

They
said tightening liquidity through the monetary policy rates, in
anticipation of expected inflation due to election spending, is not
going to help private sector lending, which is already contracting due
to increase in government lending. This portends more difficult times
for manufacturers, the private sector, and the average person in the
near and long term.

“The
only component that has grown is credit to government, which has
affected credit to the private sector, because that has contracted over
the months. The way out is to hope that the confidence that seems to
have returned to the markets should stay. If it does, prices would rise
and then markets would rise,” Ayo Teriba, managing director, Economic
Associates, a finance firm, stated last week.

According
to him, the key demand side driver of the economy is interest rates,
especially interest rates on the treasury bills, and Nigeria remains
among the nations with lower interest rates, operating well above
average.

“However,
compared to where we were, liquidity has been tightening in Nigeria and
this could be felt even in the stock market. Even though the stock
market has been faring better, when compared to some other stock
markets, it has been worsening locally,” Mr. Teriba said.

“Figures
obtainable indicate that there is credit crunch, that credit is
tightening, and at the end, you say you want to tighten liquidity,
based on an expected inflation that would be as a result of anticipated
election spending. This is not really appropriate now,” he added.

Akinbamidele
Akintola, a finance analyst at the Renaissance Capital, an investment
bank, expressed hope that the Asset Management Company (AMCON) would
bring a turnaround in banks and help liquidity.

“By
and large, we expect a gradual turnaround in the bank, as the CBN
continues to make concerted efforts to stimulate the recovery of the
financial system by acquiring non-performing loans from the banks and
assisting them in improving their capital and liquidity. So, the AMCON
would definitely help speed up the process of rerating the banks going
forward,” Mr. Akintola said.

Caution in public sector lending

Credit
to the public sector has gradually been increasing, at the expense of
the private sector, experts say. Last year, the Central Bank warned
that commercial banks should follow laid down guidelines for lending to
all the three tiers of government and their agencies.

The
warning, which was contained in a circular by the CBN director of
banking supervision, advised commercial banks to be more cautious in
their lending to the public sector.

The
circular, which stated that “A maximum limit of 10 percent of the total
credit portfolio should be placed on public sector credits both
on-and-off balance sheet,” further reminded banks of the history of
non-performing public sector credits and, therefore, strongly advised
them to exercise caution and avoid the mistakes of the past.

“The
CBN will be constrained to reintroduce measures to curb public sector
loans if banks do not put in place appropriate measures to avoid the
excessive exposure to the sector,” it said.

Earlier
in the year, the Central Bank noted that financing conditions,
especially for businesses and firms, are likely to remain as they are
in the near term as financing institutions continue to maintain a
cautious approach to credit extension.

The
notice, which was drawn at the then special Monetary Policy Committee
(MPC) meeting, noted that the persisting tight credit conditions and
the continuing under-performance of key monetary aggregates, had
informed its earlier decision to embark on a quantitative easing policy
to be implemented through investment in debentures to be issued by the
Bank of Industry (BOI).

Bank
officials have stated that they are still trying to be careful in their
lending, given their recent experiences with margin loans, adding,
however, that while lending is challenging due to liquidity problems,
they are still doing some lending.

Experts
said the ability of the Nigerian banks to grow their loan portfolios
will be limited by their ability to grow their deposit base, which may
be undermined by deteriorating economic fundamentals.