Nigeria: Agbaje - New Lending Clause Will Reduce Loan Default

Nigeria's Naira currency (file photo).
2 September 2019

The Managing Director/Chief Executive Officer, Guaranty Trust Bank Plc, Mr. Segun Agbaje, in this interview on Arise Television, a THISDAY sister broadcast station, spoke about the initiative introduced by the Central Bank of Nigeria and the Bankers' Committee last week, saying it will encourage more banks to lend to small business and increase loan to retail customers. Hamid Ayodeji brings the excerpts:

What is your view about the decision of the CBN and Bankers' Committee to introduce a clause in loan repayment in all offer letters?

In other parts of the world, your credit management system and history are in check considering that once your credit is destroyed you cannot access credit. Unfortunately, it has taken us several years to build this credit history in Nigeria, so we still have the situation where an individual can owe one bank and borrow from another bank. So, while we are building that credit history and having a proper way of doing credit check, this is a very novel way of getting around it. Essentially, this means you cannot borrow in one bank, abandon the loan and do business in another, and I think that clause would help you. It is not a departure on what the credit agencies are doing. It is something that would help and you would put in place until you get to a place where the credit agencies and ratings become a lot more effective than they have been.

What are your thoughts on the CBN directive of maintaining 60 per cent loan-to-deposit ratio?

I do not think it is that dramatic. I think the CBN is actually good with the way it has gone about it. At the time this was announced, the loan to deposit ratio in the industry was 57 per cent, so all people have to grow by is just three per cent. This makes me think there is more alarm than reality. Growing three per cent by the end of September, for most banks, they would get really close while some would go over it. So, I think the CBN is being measured in its approach. If we had gone from 57 to 80 in three months, then we would have had a lot of chaos.

The credit clause is good, but it does not solve the problems because it appears banks do not have the right strategy to bank MSMEs. How can this be addressed?

In terms of MSMEs and retail, the loss of your lending is not done around security, rather cash flows and the risk you face a lot of times when you have SME credit or retail credit is not really collateral realisation, which happens with the corporates. It is the fact that the small business can abandon a loan in one bank and go do business with another bank because there is not a lot of underlined security, which was why banks were not lending to small businesses or retail. But there has been a departure from all of that in the past few years where people are doing a lot of cash flow lending and banks like us today in retail and SME probably have about 14 to 15 of our portfolios in that.

What is the mood among members of the Bankers Committee and do you think this policy would not bring up a lot of litigation because a man has the right to do business with multiple banks?

I think there are some people that would go down that route. But I think if every single bank has decided to adopt that clause, then you are really in a position if you want to do business with the bank, you have to go down that route. I am sure legal cases might take five years to determine their final outcome. However, I think people who are sincere borrowers would probably sign it because the intention was not to take a loan and not pay.

How is this different from the options already available to the banks as they can seize collaterals with the right of set-offs?

First of all, the rights of set-off exists within the banks. So, if you have three different accounts and you borrow under one name and you have another account, the right of set-off is restricted to your own environment. It is not really cross-carpeting in my opinion. It is a loophole that exists in the system. In developed economies you cannot owe one bank and then go do business with another bank because your credit history would catch up with you. Unfortunately, in Nigeria because we have not developed the credit history properly, people are still able to do that until they get to a point where their credit goes bad, they are deprived of a facility or loans within the banking system which is what happens everywhere else.

The idea behind this is to boost real sector lending. How would that happen?

I think loan-to-deposit ratio to 60 per cent is just the first move, at the end of September. To boost real sector, you have to lend and banks are pushing back saying, 'if I lend too quickly my non- performing loans (NPLs) ratio are going to go up.' This is a situation whereby you can lend freely; we would put things in place to ensure NPLs-to total-loans ratios do not go bad and as you grow the loan books, you are not growing the NPLs. There is no way you can boost the real sector without lending. So, this is just to give the banks comfort to be able to grow their loan books and not worry too much about the non-performing loans that happened as a result of that growth.

In this economy, how realistic does it become for lenders to payback considering the double digit interest they are going to be paying back on their loans is often way more than they are getting on their goods and services and that is why it does not really encourage a lot of people to look to banks for loans, what do you think about this?

I am not sure the double-digit interest rate on loans is Nigeria's biggest problems; because there is double-digit inflation and if you have double-digit inflation rate, you are going to have double-digit interest rate.

But it is close to 30 per cent presently?

We have a product called quick credit, it is 21 per cent, which is 1.75 a month, making it bottom of the pyramid. A lot of people who borrow out of the informal sector or salary advanced companies are already paying four to five per cent a month and they are not defaulting. So, I think the double digit interest rate is less the problem with growing; rather access to credit is the bigger issue. Most small business can survive double-digit interest rate, but not when it is as high as 30 per cent. I think most small businesses would be able to survive double-digit interest rates as low as 17 to 20 per cent; with the margins they make they would pay back.

Lending is a risk, and it is the responsibility of the bank to minimise that risk. So, is the proposal from the CBN currently not a comment on the diligence of the credit risk officers in the banks as well as the incompetence of credit registers?

The credit bureau is simple. you need to populate data for the effectiveness of the credit bureaus, and that is happening. Populating the data overtime with the Bank Verification Numbers and data population, you would be able to look at everything at your credit registry and have total information. On your way to that, you have to look for a stop gap, which is what I think this, is.

In terms of credit analysis, you can do the best analysis on the credit and the macro businesses can make this credit go bad which is something banks have come to realise. One thing banks do not really like is when you do a proper credit analysis and it is due to the character of the borrower the loan goes bad. Instances such as, diverting the funds after the business starts doing well so as not to pay the bank, which is wilful default, and that is the kind of matter this clause would take care of. When someone is taking a loan in one bank rather than paying the bank back, they go do business with another bank and operate the business properly and running credit balances there. This would allow the bank that gave the loan to pull the credit balances in another bank and make good on their obligations. So, credit analysis in itself will not avert bad loans if there is a character problem on the part of the borrower.

The whole point of trying to curtail the activities of what you have just described concerning wilful default is to boost the real sector, increase access to funds for MSMEs, which leads me to NIRSAL microfinance bank. A lot of criticism has been that even though it looks all good on paper to be available in local governments, five percent interest rate, but compared to the People's Bank which failed, what is the distinction hear?

I think NIRSAL has done well, even though it could have done better. The difference is that you are using a lot of the mainstream banks to do the disbursement which can be good or bad. Also you are teaching people in those sorts of localities how to use credit so it is going to be a slow process. Having that in mind, if you look at the progress that has been made, I think it has done good.

Earlier you said credit analysis is not going to avert bad loans based on the certain character of people, so, why can't we develop a proper system that can actually look into accessing the characters of people that are given a loan?

That is what credit history is in developed parts of the world. Even if you did not pay your phone bill you get a bad credit rating and once you try to get a loan it shows you have bad credit history. We have a product and I can tell you it is not necessarily for rich people, but you would find it is good because it is still under one per cent default. What do you do when someone opens a salary account with you, which means you do not have any security, they take a loan from you and a week after they move their salary account, which is a character problem? There is no credit rating indexing that would have seen that coming because this person up until that day was servicing their loans, receiving their salaries in your bank, but the minute they get credit for the first time, because they did not have credit card bills, phone bills, debit cards to bill them, we would not be able to detect if the person is a good borrower or bad borrower. These are the kind of things this clause would take care of because when that person moves the account, you would be able to pull the credit balances from the bank they moved it from.

Talking about GTBank, among the top five banks it is the smallest in terms of assets and you also have the smallest numbers of loan defaulters, what sort of internal strategies have you put in place to achieve this?

Answering the first question, we are not worried about size; it is not one of our objectives. At the end of the day what shareholders should be concerned about is a company that can maximise shareholder value. Thus, we are not really looking at size. As at today we are the most profitable bank in the country, we have the highest return on assets (ROA), return on equity (ROE), we have the lowest cost to income ratio, and highest share prize, which is what should concern the shareholders. To us what matters is scale and value to shareholders.

In terms of what we do to loan defaults, we like to keep our NPL low, but we are ready to take on some NPLs to help grow our lending business, especially consumer and retail credit which has become a focus for us because truthfully you cannot grow an economy without growing MSMEs and retail consumer type of credit.

GTBank is present in nine African countries and it is doing well apart from the eastern region of Africa, what initiatives are you putting in place to strengthen your position there?

East Africa has been a tricky market for us, going into East Africa is like coming to Nigeria. If you come into Nigeria as a tier-three bank you are going to struggle because the top five banks control about 60 percent of the banking business. The situation is similar in East Africa; in order to grow we would have to scale up either through mergers or acquisition.

Speaking of scaling up, most fintechs are targeting the unbanked making sure they can give people access to banks through technology, looking at Africa and how a lot of people are unbanked what is a bank like GTbank doing to look at models like this so as to implement it into their system in order to not be left behind when the world moves on to fintech for all of its banking?

Basically, fintech is doing financial transactions from outside the banking hall. I think in terms of innovation fintechs are creating payment platforms and banks are capable of creating payment platforms as well. So, we just need to start thinking more like fintechs which is what we are doing. That is why when we are launching retail products we launch them online where you can access them on your phones.

Do you think the credit risk clause is sustainable, do you see a situation where people would be discouraged to take loans or situation where people find loopholes?

There are always good people and bad people. I think that people with good intentions would go with it. Also the BVN is not easy to split because it is a unique identifier that goes with your fingerprints which makes it difficult to find a way around it. So, I believe it is going to work mostly because you go to a bank to get credit because you need it not because you enjoy it. This means most people would still come to banks to take credit and because you know those who want to wilfully not pay their loans would find it more difficult. If you go to another bank, the bank where you left the loan would have the right to pull your credit balances. So, without any doubt in mind I know this clause would reduce the default rate when loans are concerned whilst encouraging banks to give out more loans.

What else do you think the CBN as a regulator should be implementing right now?

I think the CBN is doing the right thing, I think they are moving along the right path.

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