Loan without collateral to rise in 3rd quarter —CBN

emefieleA credit survey report for the second quarter (Q2) 2018 released by the Central Bank of Nigeria (CBN) last week has shown that the availability of unsecured credit provided to households rose in the current quarter and was expected to rise in the next (Q3) quarter.

Finance experts describe unsecured loans as loans that are approved without the need for collateral. Instead of pledging assets, borrowers qualify based on their credit history and income. Lenders do not have the right to take physical assets (such as a home or vehicle) if borrowers stop making payments on unsecured loans.

According to CBN, lenders reported higher appetite for risk and increased availability of funds as the major factors that contributed to the increase in Q2 2018.

Despite the resolve by banks to tighten the credit scoring criteria for total unsecured loan applications in the review quarter, the proportion of approved total loan applications for households increased.

The report stated that lenders expect to tighten the credit scoring criteria in the next quarter, but anticipate that the total loans applications to be approved in Q3 2018 will increase, adding that lenders reported that spreads on credit card lending widened in Q2 2018, but were expected to remain unchanged in the next quarter.

It noted that maximum maturities on approved unsecured new loan applications lengthened in the current quarter, but lenders anticipated that they will shorten in the next quarter.

Further analysis of the survey showed that demand for unsecured credit card lending from households increased in Q2 2018 and was expected to increase in Q3 2018. Similarly, demand for unsecured overdraft/personal loans from households increased in Q2 2018 and was expected to increase in Q3 2018.

But unlike the households, the report noted that more collateral requirements were demanded from all firm sizes on approved new loan application in Q2 2018. Similarly, lenders will demand for more collateral from all firm sizes in the next quarter.

The overall availability of credit to the corporate sector increased in Q2 2018 and was expected to increase in the next quarter, it state. Changing sector-specific risks was the major factor contributing to the increase.

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Also, just as demand for secured lending for house purchase increased in Q2 2018, so did demand for corporate lending from all business sizes increased in the current quarter, and was expected to increase for all business sizes in the next quarter. Demand for overdrafts/personal loans in Q2 2018 was higher in comparison with other loan types.

The most significant factors that influenced demand for lending in the review quarter were the increase in inventory finance and capital investment, and they were expected to remain the main drivers in the next quarter.

Corporate loan performance as measured by the default rates improved for all sized business in the review quarter. Lenders also expect lower default rates on lending to all sized businesses in the next quarter.

Part of the mandate of CBN is to nurture an efficient monetary and financial system in order to promote macroeconomic stability in Nigeria. To achieve this, the bank needs to, among others, 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 public non-financial corporations (PNFCs), small  businesses and other nonfinancial corporations (OFCs). The survey serves as an input into the monetary policy document, which presents the bank’s assessment of the latest trends in lending to the Nigerian economy. It presents the results of the Q2 2018 survey which was conducted from May 21 to 25, 2018.

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