Fitch Ratings, an international financial rating agency, has said that the recent rapid credit growth or lending by Nigerian banks may lead to weakened assets.

Financial analysts also agreed with Fitch Ratings that there could be problems if Deposit Money Banks did not exercise restraint in giving out loans to selected sectors at exorbitant interest rates.

Fitch said in a special report on on Monday, that the development could give rise to weakened asset quality and higher impairment charges if left unchecked.

A director in Fitch’s Financial Institutions team, Denzil De Bie, said, “There was a marked improvement in banks’ asset quality during 2011, following the sale of problem loans to the Asset Management Corporation of Nigeria. However, rapid underlying credit growth of 30-66 per cent was evident in most of the Fitch-rated banks in 2011, which the agency considers will be a negative credit driver if it continues.

“Fitch considers that many Nigerian banks have thin levels of Fitch Core Capital, which are lower than is appropriate for Nigeria’s difficult operating environment. Sustainable Fitch Core Capital ratios will be a key rating driver for any future positive action on the banks’ Viability Ratings.”

The report posted on the agency’s website, highlighted some key rating drivers for Nigerian banks in the context of their mostly ‘B’ range Viability Ratings.

The agency noted that improved efficiency would be a key differentiator for the more successful banks and would support earnings growth and ultimately contribute to better internal capital generation.

A former President, Association of National Accountants of Nigeria, Dr. Samuel Nzekwe, in his reaction, said the alarm by the agency showed that the banks were beginning to make errors in terms of giving out loans.

He said, “Some of these loans, if they (DMBs) don’t take time, will become toxic again. This is because we don’t see the impact of some of the loans they give out on the economy.

“The loans they give are mostly short-term, they hardly do long-term lending. And in this short-term, the cost of borrowing is very high. And then if the cost of borrowing is very high, then, it might be difficult for the borrower to pay back.”

Nzekwe, wondered what a borrower would do to be able to earn profit to pay back a loan taken at about 20 per cent interest rate.

“So what they (Fitch) is saying is that the high interest rates may make it difficult for the borrower to pay and when this happens there will be crisis,” he said.

The Chief Executive Officer, Economic Associates, Dr. Ayo Teriba, observed that the long-term impact of interest rates on DMBs will not mean well for the sector and the economy.

He said, “I have always said that high rates will not mean well in the long-term. So when you borrow at these rates, how do you expect the borrower to repay? And if this happens, what do you expect of the sector and the economy?”

Source: Punch/Okechukwu Nnodim