Bank borrowers’ woes to increase as IFRS9 rule may contract lending

By Moses Obajemu

Borrowing bank customers in the country may have to contend with stricter collateral requirements and tougher scrutiny than before if they wish to access facilities from their banks, business a.m. has learnt.

The development is coming on the heels of the directive by the Central Bank of Nigeria (CBN) that banks must henceforth use IFRS 9 as a basis for the preparation of their accounts.

IFRS 9 is the aspect of the new accounting rules which mandates companies to make provision for both their bad loans and the  ones that may go bad in the future owing to certain circumstances. Unlike in the past where banks only provided for bad loans, they now have to provide for future bad loans making the loan provisioning a ‘double course’.

Analysts contend that borrowers will now sweat to be able to meet up with the new loan requirements that the banks will now roll out in the wake of the new development. The new credit criteria may require collateral facilities that can be easily converted to cash and those that are not in any way encumbered by previous commitments by the borrowers.

For the small and medium scale enterprises, the picture really looks gloomy as the additional collateral requirements may be out of their reach and will further make their quest to access bank loans more difficult.

Some analysts also said the new rule may see banks profits dropping as the regime of double provisioning starts in earnest. They contend that what should have been declared as profit will now be converted to a provisioning pool thereby affecting their profitability.

The introduction of IFRS 9 as an accounting pillar in accounts preparation will most likely expose weak banks very easily as their financial positions, state of health and liquidity can be easily seen at a glance.

However, David Isiawve, group audit executive, Union Bank Plc, told business a.m. that the new system would not negatively affect banks’ profitability but rather enhance it.

According to him, banks would be more circumspect in their credit administration system such that the possibility of bad loans will almost be non existent. He said when the proper due diligence and loan appraisal procedures have been meticulously followed, there will be little to be provided for thereby making banks to post better profits.

In December 2018, the National Bureau of Statistics, NBS, released a report which revealed that the value of Non Performing Loans (NPLs) in the third quarter of 2018, Q3’18 in the banking sector, increased by N400 billion or 21 percent to N2.3 trillion from N1.9 trillion in Q2’18, though it also indicated a slight four percent decline when compared to N2.4 trillion recorded in the corresponding period of 2017.

This corroborates the most recent report of global rating agency, Moody’s which warned that losses to bad loans remain high in Nigeria’s banking industry. In its 2019 Outlook on African Banks, Moody’s stated that while Nigerian banks now enjoy improved foreign currency liquidity due to higher oil prices, they however face the challenge of rising loan quality.

Moody’s said asset risks nonetheless remained high as banks continue to tackle legacy issues, just as earnings remain under pressure as loss-loss provisions remain elevated. Capital buffers are strong for the bigger banks, but weaker for smaller banks,” it explained.

While affirming a ‘Stable’ outlook for African banks, Moody’s highlighted risks to banks on the continent to include rising US interest rates and political uncertainty in some countries including Nigeria.

It stated: “Our outlook for African banks is stable but risks are tilted to the downside though banking prospects remain strong over the longer term. Risks to the operating environment relate to: Rising US interest rates leading to capital outflows across emerging markets, in conjunction with rising government debt and currency depreciation, could significantly harm banks’ loan quality and access to foreign currency; Political uncertainty and risk of social unrest are an ever-present challenge for Africa; South Africa, Tanzania, Nigeria are some of the countries that face such challenges, which could weaken investor and consumer confidence.

Moody’s warning is coming on the heels of similar concern expressed by its global rating companion, Fitch Ratings on Nigerian banks. In its latest credit rating for three Nigerian Tier-1 banks, namely Access Bank, GTBank and UBA, Fitch warned that Nigerian banks face pressure on margins and capital.

“The fragile economic recovery restrains banks’ growth prospects and asset quality. Operating conditions are still difficult for banks. Despite stronger oil prices in second half of 2018 (H2’18) supporting economic growth, credit demand is weak and banks face pressure on margins and capital,” the rating agency stated.

Fitch believes that sovereign support to Nigerian banks cannot be relied on given Nigeria’s weak ability to provide support, particularly in foreign currency. In addition, there are no clear messages of support from the authorities regarding their willingness to support the banking system. “Therefore, the Support Rating Floor of all Nigerian banks is ‘No Floor’ and all Support Ratings are ‘5’. This reflects our view that senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable”, Fitch stated.