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Banks reduce lending to oil firms, airlines

By on January 16, 2015

Companies in major sectors of the Nigerian economy are in for a tougher year as Deposit Money Banks have started reducing lending to them by as much as 50 per cent, our correspondent has learnt.

It was gathered that corporate customers in sectors that are likely to be affected by the proposed cut in government spending this year are already having difficulties securing credit facilities from their lenders.

A top banker close to the development said, “The banks are already cutting credit lines to certain categories of corporate customers whose cash flows are likely to be heavily affected by the proposed cut in government spending this year. Nigerian airlines, travel agencies and companies that depend on government patronage are among these categories.

“The government has put a stop to all non-essential travels, including training and conferences; airlines and allied companies will have their cash flows affected. Also, other companies that depend on government contracts and patronage have all had their credit lines slashed.

“Some credit lines will be stopped completely. This has led to a situation whereby those companies that used to get say N1bn or N500m in a month can only get about half of the amounts or less now.”

Companies in the oil and gas sector, it was further leant, were also included in the list of firms whose credit lines had been drastically reviewed by most of the lenders.

Our correspondent gathered that the development followed the continued fall in the prices of crude oil in the international market.

Already, existing loan obligations to banks by some companies in the oil and gas sector were being threatened as the firms’ fortunes continued to be affected by the falling oil prices and weak demand for crude oil and other export commodities in the global market.

Reacting to the development, the Managing Director, Cowry Assets Management Limited, an investment banking advisory firm, Mr. Johnson Chukwu, said it was the practice of banks to review their credit policies from time to time in line with the economic outlook of the country, by reducing credit to economic sectors that were most vulnerable.

He said the development would “slow economic growth but it is better not to grant credit to companies that will not pay back.”

Chukwu said, “Once the macro-economic indicators are not strong, sectors that are highly vulnerable should not expect credit because they may not be able to pay back. Banks will manage their risks based on the economic outlook. They will look into those sectors that are vulnerable and moderate their risks in such sectors. Banks look into cash flows and take their decisions.

“Take for example, the upstream marginal field operators who may have projected based on $100 per barrel and now oil is around $46 per barrel. The cash flow will not meet up. So, it is left for the financial institutions to review their credit policies for such sectors.”

The Lagos Chamber of Commerce and Industry had in its Review of 2014 and 2015 Outlook report had predicted that businesses driven by government patronage would suffer decline this year.

The report stated that capital projects of the different tiers of government would reduce drastically and this would affect some segments of the private sector.

The report stated in part, “The unfavourable revenue outlook may result in the suspension of some capital projects. Generally, government contractors will experience a slowdown in the tempo of activities in 2015.

“With declining revenue, the risk of default in payment for jobs executed for government agencies will be higher in the short term. This situation calls for cautious engagement with government contracts at all levels of government. As government revenue contracts, the capacity to meet financial contractual obligations may be difficult.

“Already, some MDAs of the Federal Government and state governments are having difficulties in the payment of workers’ salaries. Many of the states are also currently servicing debts, having raised funds in the capital market.

“With the current developments, many ongoing contracts, especially the medium to large ones, will attract cost variations. Clearly, the exchange rate depreciation will alter many cost parameters. This is a new challenge that many contractors and suppliers as well as their clients will have to confront. This will happen in the public and private sectors.

 

[Punch]