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Availability of Credit to the Corporate Sector Increases in Q4 2016 - CBN

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Tuesday, December 06, 2016/ 6.44 PM / CBN   

Executive Summary

 

Supply

The availability of secured credit to households increased in Q4, 2016 and was expected to increase in the next quarter. Changing economic outlook remained a major factor behind the increase.  

Lenders reported that the availability of unsecured credit to households increased in Q4, 2016 and it was expected to increase further in Q1, 2017. Lenders reported that changing economic outlook contributed to the change in credit availability in Q4, 2016.  

The overall availability of credit to the corporate sector increased in Q4 2016 and was expected to increase further in Q1, 2017. The major factors contributing to increased credit availability were, changing sector specific risk, brighter economic outlook, improved liquidity conditions and tight wholesale funding conditions.

Demand 

Demand for secured lending for house purchase increased in Q4, 2016, and was expected to increase further in the next quarter. In spite lenders stance in tightening the credit scoring criteria in the current quarter, the proportion of loan applications approved in Q4, 2016 increased.  

Demand for unsecured credit card lending and overdraft/personal loan from households decreased in the current quarter, but was expected to increase in the next quarter. Due to lenders stance on the tightening in the credit scoring criteria, the proportion of approved households total loan applications decreased in the current quarter and was expected to decrease further in the next quarter.  

Lenders reported increased demand for corporate credit across all firm sizes in Q4, 2016. Lenders also expect increased demand across all firm sizes in the next quarter. Following the widen spread between bank rates on all firms’ size businesses and MPR, the proportion of loan applications approved for small and medium businesses decreased in Q4, 2016.  

Defaults 

Secured loan performance, as measured by default rates deteriorated in the review quarter. However, lenders expect lower default rates in the next quarter. Total unsecured loan performance to households, as measured by default rates worsened in Q4 2016 but was expected to improve in the next quarter.  

Corporate loan performance worsened across all firm sized business in the current quarter as default rates on lending to small, medium and large PNFCs worsened in the current quarter, but was expected to improve in the next quarter.

Loan pricing 

Lenders reported that the overall spreads on secured lending rates on approved new loans to households relative to MPR widened in Q4 2016, but was expected to narrow in Q1, 2017.  

Lenders reported that spreads on credit card lending narrowed in Q4, 2016 and were expected to narrow further in the next quarter. However, spreads on overdrafts/personal loans widened in Q4, 2016 but were expected to narrow in the next quarter.  

Changes in spreads between bank rates and MPR on approved new loan applications to small businesses, medium & large PNFCs and other financial corporations (OFCs) widen in Q4, 2016. Similarly, spreads on loans to all size businesses, were expected to widen further in the next quarter. 

Introduction  

As part of its mission to maintain monetary and financial stability, the Bank needs to understand trends and developments in credit conditions. This quarterly survey of bank lenders is an input to this work. Lenders were asked about trends and developments in credit conditions in the current and next quarters.  

The survey covers secured and unsecured lending to households, lending to non-financial corporations, small businesses and non-bank financial firms. Along with various data sources and discussions between the major lenders and bank staff, this survey serves as an input into the Monetary Policy documents which presents the CBN assessment of the latest trends in lending to the Nigerian economy.  

This report presents the results of the Q4 2016 survey which was conducted from November 21-26 2016. The results are based on lenders’ own responses to the survey. They do not necessarily reflect the Bank’s views on credit conditions. To calculate aggregate results, each lender is assigned a score based on his response. Lenders who report that credit conditions have changed ‘a lot’ are assigned twice the score of those who report that conditions have change ‘a little’.  

These scores are then weighted by lenders’ market shares. The results are analyzed by calculating ‘net percentage balances’ — the difference between the weighted balance of lenders reporting that, for example, demand was higher versus lower or terms and conditions were tighter versus looser. The net percentage balances are scaled to lie between ±100.  

Fourth Quarter 2016 Credit Conditions  

The fourth quarter credit condition survey of households, small businesses and corporate entities indicated increases in the availability of both secured and unsecured credit. Spreads on overall secured and unsecured lending to household widened in Q4, 2016 and was expected to remain widened in the next quarter.  

Lenders reported that household demand for house purchase lending increased in Q4, 2016 and was expected to increase in the next quarter. Demand for unsecured credit card lending increased in Q3, 2016, and was expected to increase in the next quarter. Demand for unsecured overdraft/personal loans from households decreased in Q4, 2016 but was expected to rise in the next quarter.  

Demand for corporate lending increased across all firm sizes in Q4, 2016 and was expected to increase further in the next quarter. However, corporate loan performance to all size businesses deteriorated in the quarter under review.  

Secured lending to households  

In the current quarter relative to the previous quarter, lenders reported an increase in the availability of secured credit to households. Lenders noted that a brighter economic outlook and tight wholesale funding conditions were major factors behind the increase.  

The availabilityof secured credit was also expected to increase in the next quarter with tight wholesale funding conditions as the major contributory factor (Question 6). Despite lenders stance on tightening the credit scoring criteria in Q4, 2016, the proportion of loan applications approved in the quarter increased.  

Lenders still expect the credit scoring criteria to remain tightened in the next quarter and expect the proportion of household’s loan applications approved in Q1, 2017 to further increase. (Questions 3 & 4). Maximum Loan to Value (LTV) ratios remained increased in the current and next quarters (Question 5c).  

Lenders expressed their unwillingness to lend at low LTV ratios (75% or less) in both the current and next quarters. Similarly, they expressed unwillingness to lend at high LTV (more than 75%) in the current quarter and the next quarter (Question 10). The average credit quality on new secured lending improved in Q3, 2016 and was expected to improve further in Q4, 2016 (Question 9).  

Lenders reported that the overall spreads on secured lending rates to households relative to MPR widened in Q3, 2016 and was expected to further widen in the next quarter. Widened spreads were reported for prime, buy to let and other lending in Q4, 2016 and were expected to widen further in the next quarter (Question 5a).  

Households demand for lending for house purchase increased in Q4, 2016 and was expected to further increase in the next quarter. Of the total demand, increase in households demand for buy to let and other lending were reported, and were expected to increase further in the next quarter except demand for prime lending (Question 1a).

Households demand for consumer loans, mortgage/remortgaging and small businesses rose in Q4, 2016 and were expected to rise further in Q1, 2017 (Questions 1b, 1c and 2). Secured loan performance, as measured by default rates worsened in Q4, 2016 and but was expected to improve in Q1, 2016. Loss given default deteriorated in the current quarter but was expected to improve in the next quarter (Questions 7 & 8).  

Unsecured lending to households

The availability of unsecured credit provided to households rose in the current quarter and was expected to further rise in the next quarter. Lenders reported brighter economic outlook, increased appetite for risk and higher cost/ availability of funds as factors that contributed to the increase in Q4, 2016 (Question 6).  

Due to Lenders resolve to tighten the credit scoring criteria for total unsecured loan applications in Q4, 2016, the proportion of approved total loan applications for households decreased in the quarter. Lenders expect to further tighten the credit scoring criteria in the next quarter, and are still of the opinion that the total loans applications to be approved in Q1, 2017 will further decrease (Questions 3c & 4c). 

Similarly, lenders tightened the credit scoring criteria for granting credit card loan applications and expect the proportion of approved credit card applications to decrease in Q4 2016 (Questions 3a & 4a). Lenders resolve to tighten the credit scoring criteria in granting overdraft/personal loan applications in the current quarter decreased the proportion of approved household’s overdraft/personal loan applications in the current quarter. (Questions 3b & 4b).  

Lenders reported that spreads on credit card lending narrowed in Q4 2016 and was expected to narrow further in the next quarter. Spreads on unsecured overdrafts/personal loans on approved new loan applications widened in the current quarter and was expected to be narrowed in the next quarter (Questions 5a & b). The limit on unsecured credit cards on approved new loan applications decreased in Q4, 2016 and was expected to further decrease in the next quarter (Question 5d).  

The minimum proportion of credit card balances to be paid on approved new loan applications decreased in the review quarter, but was expected to increase in the next quarter (Question 5e). Maximum maturities on approved unsecured new loan applications were shortened in both the current and next quarters (Question 5f). Demand for unsecured credit card lending from households decreased in Q4, 2016 but was expected to increase in Q1, 2017 (Question 1a).

Also, demand for unsecured overdraft/personal loans from households decreased in Q4, 2016 but was expected to increase in Q1, 2017 (Question 1b). Lenders experienced higher default rate on credit card and overdrafts/personal lending to households in the current quarter, they however expect lower default rates in the next quarters (Questions 7a & b). Losses given default on total unsecured loans to households improved in Q4, 2016 and were expected to improve further in Q1, 2017 (Questions 8a & 8b).  

Lending to corporates and small businesses  

Credit conditions in the corporate sector vary by the size of business. The survey ask lenders to report developments in the corporate sector by large and medium-size private non-financial corporations (PNFCs), other financial corporations (OFCs) and small businesses1 .  

The overall availability of credit to the corporate sector increased in Q4, 2016 and was expected to further increase in Q1, 2017 (Question 4a). The major factors contributing to the increase in credit availability were, changing sector specific risk, brighter economic outlook, favorable liquidity conditions and tight wholesale funding conditions (Question 4b). Lenders reported that 

the prevailing commercial property prices negatively influenced credit availability of the commercial real estate sector in the current and next quarters. Conversely, it positively influenced secured lending to PNFCs in the current quarter and was to continue in the next quarter (Questions 4c1 and c2).  

Availability of credit increased for the large PNFCs and OFCs in Q4, 2016 but decreased for the small businesses and the medium PNFCs, the same trend is expected in the next quarter (Question 1). Changes in spreads between bank rates and MPR on approved new loan applications to the small, medium, large PNFCs and OFCs widened in Q4 2016. Spreads for all size business types is expected to follow the same trend in the next quarter except the large PNFCs (Questions 6a1, 6b1, 6c1 and 6d1).  

Following the widened spreads, the proportion of loan applications approved for the small and medium size firms decreased in the current quarter and were expected to increase and decrease respectively in the next quarter (Question 5). Lenders required lower loan covenants from small businesses and medium PNFCs sized businesses, and stronger loan covenants from large PNFCs and OFCs in the current quarter. (Questions 6a5, 6b5, 6c5 and 6d5).  

Fees/commissions on approved new loan applications rose for all firm sized business in the current quarter. Fees / commission were expected to rise further for all firm sized business in the next quarter. (Questions 6a2, 6b2, 6c2 and 6d2). All firm sized businesses except the small businesses did not benefit from an increase in maximum credit lines on approved new loan application in Q4, 2016.  

Similarly, lenders expect the small businesses and large PNFCs to benefit, while the medium PNFCs and OFCs will not benefit from an increase in maximum credit lines on approved new loan application in Q1, 2017. (Questions 6a4, 6b4, 6c4 and 6d4). Lenders demanded more collateral requirements from all firm sizes on approved new loan application in Q4, 2016.  

Similarly, lenders expect to demand for more collateral from all firm sizes in the next quarter (Questions 6a3, 6b3, 6c3 and 6d3) Demand for corporate lending from small businesses, medium & large PNFCs and OFCs businesses increased in Q4, 2016, they were also expected to increase in the next quarter (Question 2c, d & e). Lenders reported that demand for overdrafts/personal loans and secured lending from small businesses in Q4, 2016 were higher in comparison with other business types (Question 2).  

The most significant factors that influenced demand for lending in Q4, 2016 were the increase in capital investment and inventory finance, and they were expected to remain the main driver in the next quarter (Question 3).  

Corporate loan performance as measured by the default rates deteriorated in the review quarter. Default rates on lending to all size businesses deteriorated in Q4 2016. Lenders had mixed opinions on default rates in the next quarter, they were of the opinion that default rates for the medium and large PNFCs will improve, while the default rates for the small businesses and OFCs will further deteriorate. (Questions 7 & 8).  

The average credit quality on newly arranged PNFCs borrowing facilities improved in Q4 2016 and was expected to further improve in Q1 2017. The target hold levels2 associated with corporate lending improved in Q4 2016 and was expected to improve further in Q1 2017.  

Loan tenors on new corporate loans deteriorated in Q4 2016 and were expected to further deteriorate in the next quarter. Draw down on committed lines by PNFCs improved in the current quarter, and was expected to improve further in the next quarter (Question 9). 

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