Following banks’ implementation of reduced charges as recently directed the Central Bank of Nigeria (CBN), analysts and operators have underscored the need for banks to increase lending to growing companies in the small and medium enterprises (SMEs) space to avoid erosion of revenue and boost their bottom-line.
The analysts argued that commercial banks must depart from the usual norm of chasing a few big-ticket firms and focus more on providing loans and advances to small businesses while keeping their non-performing loans (NPLs) under check to guard against eroding income.
They also urged banks to diversify into financial advisory services like fund management, and real estate management to enhance profitability
According to them, if banks are unable to create more streams of income within the system, the hike in the sector’s mandatory Cash Reserve Ratio (CRR), in addition to the reduction of charges on services, would ultimately trigger a rise in NPL ratio, especially for those without framework to manage risks associated with such huge loans.
They argued that since these charges constitute a large portion of banks’ revenue, failure to devise other means to augment the adjustments would impact negatively on them going forward.
Furthermore, the stakeholders argued that the trend could shrink banks’ current profit levels, and ultimately hamper equity investors’ dividend payout.
For instance, the Managing Director of APT Securities Limited, Garuba Kurfi said: “Globally, banks make money by lending, but in the Nigerian context, they do not lend because they have the alternative of buying Treasury Bills and bonds and get a double-digit return, which is also free from risks.
“As long as that option is there, they will prefer to play it, but now that the CBN has made it compulsory that if you do not lend up to 65 per cent, they are going to be punished, is a wakeup call. They are chasing only very few companies, whatever Dangote decides to rise, they are willing to offer, but the growing companies they do not give them and this is why we have not gained ground.
“If you nurse these upcoming firms, they can become big firms and we have to understand that especially now that they are tax exempted. Banks need to go down and nurse these growing firms and if the banks do that, they will grow.
“The other issues are that they have to be in financial services. Financial service is very wide, banks can offer financial services, they can manage funds, they can render advisory services, and they can manage your estate. If they go into that, they can make more money.”
Also commenting, Head of Research, FSL Securities, Victor Chiazor, said banks can generate more money at a time of liquidity squeeze if they increase their loans and advances to customers. “The banks make income from fee and commission income, forex trading income, forex revaluation gains, amongst others.
“However, the CBN is determined to drive economic activities by encouraging the banks to increase lending to the real sector and reduce their investments in FGN securities. The banks are expected to generate their major income from their interest income line. This can only grow if they increase their loans and advances to customers.
“Other income lines for the banks are limited, as the sector is a highly regulated one, hence the need to grow their loan book to drive income and boost revenue.”
He pointed out that some banks’ charges constitute more than 20 per cent of their total revenue at the end of every financial year.
“These reductions from the initial figure will automatically affect banks’ revenue. The reduction is quite significant for the banks. These charges formed part of the banks’ income before now.
“If they cannot device other means to augment these charges, that may impact their bottom-line and profitability.”
The Chief Research Officer of Investdata Consulting, Ambrose Omordion, noted that the CBN Loan-to-Deposit Ratio (LDR) policy is to make banks play their traditional role of lending to create money, as the engine room of nation’s economic development through providing credit for the private sector.
“This is also expected to stimulate economic productivity that drives growth and development. This productivity on the other hand, is expected to boost the macro economy and the overall earnings and performance of the banks.
“On the contrary, if the banks after struggling to meet the loan-to-deposit ratio, and the economy remains in this weak and slow recovery pace, it would definitely throw the banks back to the era of high non performing loans.”
In furtherance of its quest to make financial services more accessible and affordable to various stakeholders in the economy, the CBN recently reviewed downward most charges and fees for banking services as contained in the new guide to charges by banks, other financial, and non-bank financial institutions, effective January 1.