Money, Money Everywhere; Banks Can’t Find Borrowers
We recall that the Central Bank of Nigeria in July 2019 advised Deposit Money Banks to maintain a minimum Loan to Deposit Ratio of 60 percent by September 2019.
The CBN set the penalty for non-compliance as a levy of additional Cash Reserve Requirement equal to 50 percent of the lending shortfall of the target ratio. The apex bank gave bite to this policy on September 30, 2019 when it deducted N499 billion from12 banks for failing to meet the 60 percent minimum Loan to Deposit Ratio.
The affected institutions are Zenith Bank (N135.6 billion), Citibank (N100 billion), United Bank for Africa (N99.7 billion), First Bank (N74.7 billion), Standard Chartered Bank (N30 billion), Guaranty Trust Bank (N25 billion), First City Monument Bank (N14.4 billion), JAIZ Bank (N7.5 billion), Keystone Bank (N4 billion), Rand Bank (N2.8 billion), FBNQuest (N2.7 billion) and SunTrust Bank (N1.7 billion).
The CBN did not stop there. It raised the bar by requiring Deposit Money Banks to maintain a minimum Loan to Deposit Ratio of 65 percent, effective December 2019.
Last week, the CBN further directed banks to cancel requests from their customers for purchase of treasury bills at primary or open market auctions, if such customers are carrying credits of such banks or other banks. The directive also affects customers enjoying CBN intervention loans.
The new order is an apparent extension of the CBN’s efforts at promoting lending to the real sector by commercial banks.
The net effect of these developments is that the CBN has turned the table in favour of small businesses. Unlike before, the banks are now forced to actively look for viable projects they can lend money to. They will now have to match their marketing drive for customers they can collect deposits from, with an even more vigorous strive to acquire customers they can advance loans to in order to meet the CBN-prescribed Loan to Deposit Ratio.
The banks are now constrained to increase the tenure and lower the interest rates of their loans to small businesses, with a view to making their loans more attractive to this segment of the credit market. These have become inevitable, if the banks are to safely balance a loosening of their purse strings without losing their monies to the CBN or being forced to underwrite non-performing loans.
The fact that the banks have money to advance as credit and are looking for borrowers, as exemplified by the 12 banks already penalised for not lending enough, should not be read as a signal that their treasuries are open for all-comers. The banks are not poised to literally stand at every traffic light and roundabout, handing bags of their hard-earned money to every bystander.
What should you do, as a Small Business Owner, to take advantage of this CBN-inspired lending initiative? Asked differently, what would your bank consider when evaluating the credit-worthiness of your business?
Banks generally consider applications for business loans on the basis of what is commonly referred to as the Five Cs of lending: Character, Cash Flow, Collateral, Capitalisation and Conditions.
1. Character: Your bank expects you to demonstrate strength of character. It will want to know if you or your business are, or have been, involved in lawsuits or bankruptcy. It will want to be reasonably certain that you and your business can be counted on taking your financial obligations seriously.
Your education, training and experience in your line of work, as they relate to the business for which you are applying for a loan will also be considered.
2. Cash Flow: Your bank needs to know that your business can generate enough cash to service the loan while meeting the other cash flow needs of the business. The bank will want to see a reasonable surplus of the income of the business over its expenses over time.
Your bank will consider the debt to income ratio of your business. A high ratio will be a red flag to your bank not to lend money to your business.
The financial statements of your business will reveal this to your banker at a glance.
3. Collateral: Your bank will want a lien on an asset in the event that the business is unable to repay the loan. This would be an asset of the business or a personal asset of the owner where that of the business is inadequate or unavailable.
The lien of the bank on an asset belonging to the business or the owner empowers the bank to dispose of it to cover its outstanding credit in case of default.
The National Collateral Registry, another initiative of the Central Bank of Nigeria, now makes it possible for small businesses to access loans by using such moveable assets as motor vehicles, farm produce, consumer goods, household items and inventory as collateral.
4. Capitalisation: This is represented by the cash and equity in the business, including such resources as fixed assets, retained earnings, less debt. The level of capitalisation shows the business as a going concern or otherwise.
Your commitment of business and personal cash tells your bank that you are invested in the business. It makes the point that you have a skin in the game.
The bank is encouraged to put its money in the business when it sees that you also have your money in the business. The bank can only be vested in the business when you are equally or more vested in it.
5. Conditions: These are external factors that can affect the performance of the business; like market conditions, the competition and industry trends. Your bank will want to know how your business will survive and thrive against the backdrop of market forces, your competitors and industry trends.
The rating of your business, measured by the Five Cs, enables your bank to make an informed guess on the ability of your business to repay the loan. So, be sure to rank well on the Five Cs.
The banks, particularly the ones recently penalised for not meeting their Loan to Deposit Ratio, are now motivated to underwrite more loans. Prepare your loan proposal, and go see your account officer.