Nume Ekeghe
President of Association of Capital Market Academics of Nigeria (ACMAN), Professor Uche Uwaleke has said that the increase in benchmark rates alongside rising inflation may lead to an increase in non-performing loans in the banking industry.
Speaking at the bi-monthly forum of Finance Correspondents Association of Nigeria (FICAN), he noted that a higher Monetary Policy Rate (MPR) will translate to higher interest and the higher the inability of customers to pay back their loans.
“The more you increase the (MPR), the likelihood that the asset quality of banks will even deteriorate. In the last MPC communique, we were told that the non performing loans of banks have dropped to below the CBN threshold of five per cent. The MPR is the rate at which the central bank lends to commercial banks and we have a corridor of +1/-7. So that means effective lending rate is 15 per cent.
“So, if the interest rate is 15 per cent, banks of course cannot lend at below 15 per cent, it has to be higher, with the cost of doing business that is also rising. That is why you also find that banks are shifting all these things to their customers and those who are borrowing.
“You now find that lending rates will be higher as the banks now reprice their loans, and the likelihood that borrowers will default will also be higher. And that’s why increasing the monetary policy rates may lead to an increase in the non performing loans of the banking industry, “he said.
Uwaleke also noted that the higher MPR would mean the cost of government servicing its domestic debt obligations will also increase.
He said, “But the central bank has a duty to tame inflation. So, that is why inmost economies central bank is meant to be independent. Otherwise the fiscal authority may want to keep interest rates low MPR so, they can borrow at a cheaper rate. So raising the MPR will increase cost of borrowing. And that will mean cost of establishing domestic debt will of course increase.”
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