Implications of banks’ insistence on collateral for agric loans
Despite the Nigerian Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) launched by the Central Bank of Nigeria (CBN) to encourage banks to give un-collaterised loans to agribusinesses, banks still demand collaterals to lend to agricultural sector businesses, especially primary producers.
NIRSAL was established around 2010, to encourage commercial banks to lend from their portfolio rather than the government providing the money to the banks to lend to the agricultural sector. NIRSAL therefore came with risk guarantee for loans to the big, medium and small size agribusiness operators.
At inception, for input manufacturing businesses such as Notore and agricultural processors such as Dangote, the CBN through NIRSAL is to pay 30 percent of losses incurred in the event of loan default. For large farmers, and logistics businesses such as storage providers, transporters, CBN is to pay 50 percent of losses incurred. For small farmers and other agribusiness investors, guarantee is up to 75 percent.
But Justus Kachikwu, Delta State-based cassava farmer and value chain investor, says: “The collateral is what is driving the financing of cassava farmers by banks. This is because the conditions for loans by banks are still very stringent and far above what the small and medium-sized farmers can meet.”
Anga Sotonye, an agricultural produce exporter, also affirms that the CBN still needs to do a lot more sensitisation in getting banks to lend to the sector through NIRSAL, saying “I approached one of the commercial banks for a loan to finance my export business and the bank insisted on collateral. I requested for a loan under the platform of NIRSAL and the bankers said they would research into it. The bank later contacted me and insisted I bring the collateral to get the loan.”
Ikechi Okereke, a stockbroker with investment in poultry production, states that he was also requested to bring collateral to get a loan facility to finance the expansion of his farm, saying “by the time the second bank I approached completed the documentation on my collateral, it was too late that I had to refuse the loan because I had sold another property to get the funds to carry out the expansion programme for my farm.”
The real problem however is that the loan guarantee provided by CBN through NIRSAL for small-scale agribusinesses has been reduced.
Jude Uzonwanne, former managing director, NIRSAL, explains the reasons, saying “the issue of collateral has arisen again because when we issued a 75 percent guarantee (from April 2012 to August 2013), we were able to convince banks not to worry about that. But once we reduced the guarantee to a range of 5 percent to 15 percent starting in September 2013, at the insistence of the Central Bank which had become concerned that banks were starting to take too much risk or just approving any loans. In spite of our view, that we conducted our own review as well, so we did not just approve anything that came to us for a guarantee, it unfortunately chilled the market to a degree. We are still seeing guarantee requests, but it will narrow somewhat and overtime will grow as bank confidence rises again.”
Explaining further, he says: “To get a NIRSAL guarantee, you must first convince your bank to lend to you, after which your bank brings the loan to NIRSAL for a guarantee,” stressing that “once those terms were made less generous (drop from 75% to average 10% guarantee), it is not a surprise that the market pulled back.”
Affirming that, a source from the financial sector, says: “The guarantee by the Central Bank is not 100 percent. So, that part of the the risk still rests with the banks, and the banks have to find a way to protect themselves and only demand collateral for the part of the loan that is not guaranteed.”
These industry watchers also say bank lending to agriculture has grown from 1.6 percent in 2010 to 6 percent in 2013, which is over 300 percent.
Most of the lending to small farmers through NIRSAL has been through co-operatives that brought hundreds of farmers together.
At mid-2013, reports by CBN showed that about N25 billion had been guaranteed to agribusiness investors through NIRSAL. NIRSAL is expected to generate an additional N450 billion of bank lending from 2010 to 2020, by derisking the agricultural value chain and increasing lending to agriculture to 7 percent of total bank lending. NIRSAL is an initiative of the CBN, the Bankers’ Committee and the Federal Ministry of Agriculture and Rural Development.
OLUYINKA ALAWODE