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Banks advised on small business lending, diversified operations | The Guardian Nigeria News

by e-Naira Online News
June 13, 2022
in Business
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As banks’ provision for loan losses continue to increase going by the results released by financial institutions on the Nigerian Exchange Limited (NGX), analysts and operators have highlighted the need for banks to increase lending to small and medium enterprises (SMEs) to avoid erosion of revenue.

Besides, they also urged banks to diversify into financial advisory services like fund management, and real estate management to enhance profitability.

The analysts argued that commercial banks must stop chasing a few big-ticket businesses and focus more on providing loans and advances to small businesses to keep their non-performing loans (NPLs) under check.

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) would continue to trigger a rise in NPL ratio, especially for those without a framework to manage risks associated with 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 equities investors’ dividend payout.

At the end 2021 financial year, Access Bank Plc and eight other banks’ provision for loan losses increased by 0.17 per cent.

Provision for loan losses or impairment charges is the writing off of worthless goodwill and it refers to assets that have lost their value.

Specifically, the audited results revealed that a total of N199.45 billion was recorded as impairment charges by nine banks, compared with N199.11 billion in the corresponding period of 2020.

An independent investor, Amaechi Egbo 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. They are chasing only very few companies, whatever big companies decide to raise, they are willing to offer. But they do not fund growing companies.

“If you nurse these upcoming firms, they can become big firms and we have to understand that, especially now that some are tax-exempt. 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, can render advisory services, and they can manage estates. If they go into that, they can make more money.”

Also commenting, the Chief Research Officer of Investdata Consulting, Ambrose Omordion, said banks can generate more money at a time of liquidity squeeze if they increase their loans and advances.

“The banks make income from fees and commissions, 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 government 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 devise other means to augment these charges, that may impact their bottom-line and profitability.”

He 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 the nation’s economic development by 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.”





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Tags: advisedBanksbusinessDiversifiedGuardianlendingNewsNigeriaOperationsSmall
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