Monetary Policy initiatives and development by the Central Bank of Nigeria has helped prevent a severe credit crunch in the private sector, according to the World Bank. The World Bank made this remark in its bi-annual Nigerian Development Update, a report published twice yearly. Businesses in Nigeria suffered in the early part of 2020 over Covid-19 induced lockdowns which led to massive revenue losses, inventory pile-ups, rising cost of goods and services, job losses and rising default rates.

This led the central bank into galvanizing blue-chip firms to raise funds via its CACOVID initiative, inject trillions of Naira in intervention funds, approve regulatory forbearance for non-performing bank loans and lower monetary policy rates to keep interest rates from rising. The World Bank has now affirmed that these policies prevented a credit crunch that could have prolonged Nigeria’s recession.

“Thus far, the CBN’s policy initiatives and development-finance interventions have helped prevent a severe credit crunch in the private sector. The CBN cut its monetary policy rate by 100 bps in May 2020 and by another 100 bps in September. Regulatory forbearance for the restructuring of pandemic-affected exposures is now in effect until March 2022. The CBN has softened the terms of its development-finance interventions, and the new terms have been extended through March 2022; it has also launched a range of new development-finance initiatives at subsidized interest rates in an attempt to ease the impact of COVID-19 on households and SMEs”.

“It is also helping pharmaceutical companies, health practitioners, and SMEs respond to the pandemic by injecting up to N400 billion in loanable funds. The new funding is equivalent to about 2 percent of private sector bank credit.” The world bank also reemphasized the impact that regulatory forbearance has had on maintaining confidence in the banking sector that was initially shaken by the possibility of non-performing loans.

In May 2020, the CBN issued a circular stating that it will be reducing interest rates on its facilities through participating financial institutions from 9% to 5% per annum for a year with effect from March 1, 2020. It also granted one-year moratorium on all principal repayments for all its intervention funds, effective March 1, 2020. It also allowed financial institutions to consider temporary and time-limited restructuring of the tenor and loan terms for households and businesses affected by COVID-19, subject to the recently issued guidelines for restructuring affected credit facilities in the OFIs sub-sector. Earlier in March 2021, it extended its Covid-19 Forbearance by another 12 months.

The World Bank believes these initiatives have helped in no small measure to avoid a credit crunch. According to the World Bank, “the regulatory forbearance granted by the CBN for restructuring loans impacted by COVID-19 was crucial to keep the banking system sound, but in the next few quarters NPLs are expected to rise” suggesting that things may turn out gloomy sooner rather than later.

The report from the World Bank also mentions the IMF report that claimed a recent CBN Stress test revealed that Nigerian banks will see their CAR drop to below 10% if 25% of “unstructured loan portfolio” of banks are migrated to NPL Status.

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